EMI, which stands for equated monthly installment, is the monthly amount payments we make towards a loan we opted for. "EMI payments include contributions towards both principal and interest on the loan amount. The interest component constitutes the major portion of the EMI payment in the initial stages. As we progress along the loan tenure, the portion of interest repayment reduces and contribution towards the principal repayment increases

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

(P x I) x ((1 + r)n)/ (t x ((1 + r)n)- 1)

in which P is equal to the principal amount borrowed, I 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.

 

Loan Amortization Schedule
Loan amortization schedule is a tabular presentation of the loan with the EMI payment. It shows the break up between the interest component and principal component of a particular EMI payment. This schedule helps the investor to examine how the loan is being paid and how much outstanding loan is left to be paid. It contains information like time period of payment, EMI, interest, principal payment and the outstanding loan. In case the loan bearer wants to foreclose the loan or wants to refinance his loan, this schedule is very helpful in such cases.