The full form of EMI is Equated Monthly Instalment. It is a fixed monthly amount that a borrower pays to repay a loan or a big purchase such as a house, vehicle, or electronics. Every EMI payment has two components: the principal (the original amount borrowed) and the interest (the interest on borrowing).
How Do EMIs Work?
When you borrow, the lender determines your EMI using the loan amount, interest rate, and loan term. This EMI remains constant over the life of the loan in most instances, simplifying budgeting. Every monthly instalment decreases the loan balance and settles the interest accrued during the month. Gradually, the balance of the loan decreases until it is paid off completely at the end of the term.
There exist two popular ways of calculating EMI:
- Fixed Rate Method: Rate of interest remains unchanged, therefore the monthly payments are fixed.
- Reducing Balance Method: Interest is charged on the outstanding amount, hence the amount of interest lessens each month, influencing the EMI.
Significance of On-Time EMI Payments for Your CIBIL Score
Your CIBIL score is one of India’s most important credit scores, utilised by lenders to assess your creditworthiness. Payment of EMIs on time helps your credit score positively by exhibiting financial responsibility and reliability. Punctual, regular EMIs indicate that you’re capable of handling debt responsibly, and this generates trust among lenders.
Consequences of Defaulting on EMI Payments
Missing or delaying EMI payments can negatively impact your credit score heavily. Defaults are reported to credit bureaus and may decrease your CIBIL score, making it difficult for you to secure future loans or credit cards. Moreover, you will be liable for penalty charges and legal proceedings by lenders to recover dues. A bad credit score due to defaults can hike your interest rates and decrease loan approval likelihood.
Nutshell
EMI is fixed monthly payments divided into interest and principal.
- EMIs ease big expenses by delaying payment over a period of time.
- Determined with principal, rate of interest, and tenure.
- On-time EMI payments enhance your CIBIL score.
- Defaults and delayed payments deteriorate credit scores and credit reputation.
Knowledge about EMIs and regular payment on time is crucial for a sound financial planning and robust credit rating.
