Which of the following are correct about equated monthly installments (EMI)?
(A) The EMI depends on principal borrowed, rate of interest and tenure of the loan.
(B) It is a fixed amount made by borrower to the lender every month.
(C) The interest remains constant for every EMI in reducing balance method.
(D) As we pay off our loan, the outstanding principal amount decreases with every EMI in reducing balance method.
Choose the correct answer from the options given below:
Which of the following are correct about equated monthly installments (EMI)?
(A) The EMI depends on principal borrowed, rate of interest and tenure of the loan.
(B) It is a fixed amount made by borrower to the lender every month.
(C) The interest remains constant for every EMI in reducing balance method.
(D) As we pay off our loan, the outstanding principal amount decreases with every EMI in reducing balance method.
Choose the correct answer from the options given below:
Solution
EMI stands for Equated Monthly Installment. It is a fixed payment made by a borrower to a lender at a specified date each month.
Statement (A): The EMI depends on principal borrowed, rate of interest and tenure of the loan.
This is correct. The EMI formula incorporates all three variables:
- Principal (P): Amount borrowed
- Rate of interest (R): Cost of borrowing
- Tenure (N): Time period of the loan
Higher principal or higher interest rate increases the EMI. Longer tenure decreases the EMI.
Statement (B): It is a fixed amount made by borrower to the lender every month.
This is correct. EMI remains constant throughout the loan tenure. The same amount is paid every month from start to finish.
Statement (C): The interest remains constant for every EMI in reducing balance method.
This is incorrect. In the reducing balance method, interest is calculated on the outstanding principal amount. As the principal reduces with each payment, the interest component also decreases.
Each EMI consists of two parts:
- Interest component (decreases over time)
- Principal component (increases over time)
The total EMI remains fixed, but the proportion changes.
Statement (D): As we pay off our loan, the outstanding principal amount decreases with every EMI in reducing balance method.
This is correct. Each EMI payment includes a principal component that reduces the outstanding loan amount. With every payment, the remaining principal becomes lower.
Statements (A), (B), and (D) are correct.
Statement (C) is incorrect.
The correct answer is: (A), (B) and (D) only