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July 16, 2017 | 12:00 | Dubai
The lure of cheap financing offered often makes one avail of loans without the proper understanding of the essential structure of the financing contract. In the next few series we will try to explain esssential know-hows around the loan. Here we look at the structure of the Equated Monthly Installment (EMI).
The EMI is a fixed installment calculated at the time of giving the loan. It consists of both the principal proportion and interest proportion of your loan. As the period of loan repayment nears the end, the principal portion of the EMI increases indicating higher repayment and the interest portion decreases. But the full EMI amount remains as is. The graph below indicates the same phenomena:
Let’s understand this with an example. Assume you have a AED 100,000 loan for a period of 20 years @ 4%. So the EMI on this loan comes to AED 606 per month, totaling to AED 7358 per year.
This EMI remains the same during the 20 year period. You would pay AED 606 in the 1st month and you would pay AED 606 in the 240th month. The only difference is that your first EMI has an interest portion of AED 333 and principal portion of AED 273 while your last EMI has an interest portion of AED 2 and principal portion of AED 604. So basically the only thing that changes, is the proportion of interest and principal amount in the EMI.
At the end of the 20 year period, you end up paying at total of AED 145,435 out of which your AED 45,435 is the interest.