Understanding an EMI
December 21, 2006
An interesting aspect of home loan finance is the determination of the eligible loan amount. One important scale is the percentage of debt service amount, which is represented by equated monthly installments, to disposable or take home income. Equated Monthly Installment (EMI) is the total amount due every month, this is determined by the bank or other financial institution that you have your loan out with. A loan officer uses the principal, the repayment period, the rate of interest, and how the rate of interest is computed to determine what your EMI is. The equated monthly installment should be roughly 35% of the household's total income. A high EMI that takes away a large portion of the family's income may lead to a possible default. A low equated monthly installment increases the loan period and can be a risk to the lender. Determining the perfect EMI for each loan recipient is an important and vital aspect to any bank or other financial institution. If a loan's interest rate increases, and all of the other factors stay constant, the eligibility amount would decrease, and the overall home loan sanctions and disbursement can be expected to go down. There could also be a decrease between borrowers feel that the cost at the increased rate is too expensive for them, though for home loans the sensitivity for little movements in interest rates may not be very high.
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