What is EMI?
An EMI stands for Equated Monthly Instalment. It is a fixed payment that a borrower makes to a lender, like a bank or NBFC, every month on a specific date, until the loan is fully paid back.
Each EMI is made up of two parts:
- Principal – this is the actual money that was borrowed.
- Interest – this is the cost that the lender charges for lending the money.
As time goes on, the interest part of the EMI gets smaller, and the principal part becomes bigger. But the total amount of the EMI usually stays the same for the whole loan period, especially if the interest rate is fixed.
EMI is commonly used for:
- Home loans
- Car loans
- Personal loans
- Consumer durable loans (like mobile phones and electronics, etc.)
The formula to calculate EMI is:
EMI = (P × r × (1 + r)^n) / ((1 + r)^n - 1)
Where:
- P = The loan amount (the principal)
- r = The monthly interest rate (calculated by dividing the annual interest rate by 12 and then by 100)
- n = The loan term in months
What Happens If I Miss an EMI Payment?
If you miss an EMI (Equated Monthly Instalment) payment, several things can happen depending on your lender's policies and how long the delay is:
1. Late Payment Charges
- Most banks/NBFCs charge a penalty fee for missed or delayed EMIs.
- This could be a flat fee or a percentage of the EMI amount.
2. Increased Interest Burden
- Interest may keep adding on the overdue amount, making your total repayment costlier.
- Sometimes, missed EMIs are added to the end of the loan tenure, extending it.
3. Impact on Credit Score
- A single missed EMI can reduce your CIBIL/credit score by 50–100 points.
- Multiple missed EMIs indicate poor repayment discipline, making it harder to get future loans or credit cards.
4. Reminder & Recovery Calls
- The lender may start with reminder emails/SMS and then phone calls.
- Continuous default may lead to legal notices or recovery action.
5. Collateral Risk (for Secured Loans)
- In home loans, car loans, or gold loans, repeated defaults can lead to the lender seizing the asset.
6. Loan Recall / Legal Action
- If you default for many months, the lender may recall the loan (demand full repayment immediately).
- For large amounts, they may initiate legal action under recovery laws.
Can I Pre-Close My EMI Plan?
Yes, you can pre-close (foreclose) your EMI plan, but there are a few important points to know:
What Pre-closure Means
Pre-closure (or foreclosure) means paying the remaining loan amount in one shot before the loan tenure ends. This helps you save on future interest since you're clearing the balance early.
Rules & Conditions
- Waiting Period: Many lenders require you to complete a minimum lock-in period (usually 6–12 months) before you can foreclose.
- Pre-closure Charges: Some banks/NBFCs charge a penalty (1–5% of outstanding loan amount). For example, personal loans often have foreclosure charges, while home loans (for individuals, on floating rate) usually have no foreclosure charges as per RBI rules.
Documents Needed
- Loan account number
- ID proof
- Cheque/DD/online transfer of outstanding balance
- Foreclosure request form
Procedure
- Visit the bank branch or request online (if allowed).
- Pay the outstanding principal + any interest till date + charges (if applicable).
- Collect No Dues Certificate (NOC) and loan closure letter.