What happens if I miss a monthly EMI payment?

The interest rate on an Equated Monthly Installment (EMI) loan is calculated using various methods, and the specific method depends on the type of loan and the lender's policies. Here are the common methods used to calculate interest on EMI loans:

1. Flat Interest Rate: In this method, interest is calculated on the entire loan principal throughout the loan tenure. The interest amount remains constant, and it doesn't decrease even as you repay the principal. The EMI is calculated by adding the interest to the principal and dividing by the number of EMIs. This method results in higher interest costs compared to other methods.

EMI = (Loan Principal + Total Interest) / Number of EMIs

2. Reducing Balance Method: This is the most commonly used method for calculating interest on EMI loans. In this method, the interest is calculated only on the outstanding loan balance. As you make EMI payments, a portion of each payment goes towards interest, and the remainder reduces the principal. As the principal decreases over time, the interest component also decreases, and more of your EMI amount goes towards repaying the principal. This method generally results in lower total interest costs compared to the flat interest rate method.

The formula for calculating the EMI using the reducing balance method is a bit complex and typically involves standard financial calculations or software.

3. Daily Reducing Balance: Some lenders use a daily reducing balance method, where the interest is calculated daily based on the outstanding principal balance. This method is more precise and can result in slightly lower interest costs compared to monthly reducing balance methods.

4. Annual Reducing Balance: In this method, the interest is calculated once a year based on the annual outstanding balance. It's less common than the monthly or daily reducing balance methods.

To calculate your EMI and interest payments accurately, it's recommended to use specialized financial calculators, online EMI calculators provided by lenders, or consult with your lender directly. The EMI amount is determined based on the loan amount, interest rate, and loan tenure. Remember that the method used to calculate interest can significantly impact your overall interest costs, so it's crucial to understand the method employed by your lender when taking out an EMI loan.