Equated monthly installment(EMI)
An equated monthly installment (EMI) is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly installments are used to pay off both interest and principal each month so that over a specified number of years, the loan is paid off in full. With most common types of loans, such as real estate mortgages, the borrower makes fixed periodic payments to the lender over the course of several years with the goal of retiring the loan.
EMI formulae
The EMI could be calculated using the flat rate method or the reducing balance method. The EMI flat rate formula is calculated by summing the principal loan amount and the interest on the principal. The sum is divided by the number of periods in months.
The EMI reducing balance method is calculated using the formula
\[EMI = \frac{PR\left ( 1+R \right )^{n}}{\left ( 1+R \right )^{n}-1} \]
in which P is equal to the principal amount borrowed, r is the annual interest rate, R is periodic monthly interest rate, n is the total number of monthly payments and t is the number of months in a year.
r is annual interest rate hence it should be divided by 12 to get monthly intrest rate i.e
\[R = r/(12 X 100) \]
