Question 1

What is EMI and how is it calculated?

Accepted Answer

EMI (Equated Monthly Instalment) is a fixed monthly payment made to repay a loan over a set period. It is calculated using the formula: EMI = P × r × (1+r)^n / ((1+r)^n − 1), where P is the principal, r is the monthly interest rate, and n is the number of months.

Question 2

What is a good EMI-to-income ratio?

Accepted Answer

Most financial advisors recommend keeping your total EMIs below 40–50% of your monthly take-home salary. For home loans specifically, lenders typically approve EMIs up to 40% of your net income.

Question 3

Does paying a higher EMI reduce total interest?

Accepted Answer

Yes. A higher EMI reduces your loan tenure, which means you pay interest for fewer months and the total interest paid is significantly lower. Even a small prepayment early in the loan tenure can save a large amount in interest.

Question 4

What happens if I miss an EMI payment?

Accepted Answer

Missing an EMI results in a late payment penalty (typically 1–2% per month on the overdue amount), a negative impact on your CIBIL credit score, and potential legal action if defaults continue.

Question 5

Can I prepay or foreclose a loan to reduce EMI?

Accepted Answer

Yes. Most banks allow partial prepayment or full foreclosure of loans. Home loans after 2011 cannot charge foreclosure penalties for floating-rate loans as per RBI guidelines. Fixed-rate loans may have a prepayment charge of 1–4%.

Question 6

What is an amortization schedule?

Accepted Answer

An amortization schedule is a complete table showing each monthly EMI payment broken down into the interest component and the principal component. In early months, a larger portion goes to interest. Over time, the principal share increases.

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