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Publication: The Times Of |
Date: |
Section: Times Property; |
Page: 50 |
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Brick
by brick
SURESH S THROWS LIGHT ON EMI AND EAI, TWO OFT-USED
FINANCIAL TERMS
EMI
- Equated Monthly Installment
An EMI is an Equated Monthly Installment,
which remains the same over the entire loan period though the interest and
principal component is different in each EMI. Most schemes use EMI worked out
on annual rates with monthly rests. The annual rate is divided by 12 and the
interest and loan outstanding are worked out for every month. This is most
convenient for borrowers as the amount is pre-determined and certain.
EAI - Equated Annual Installment
A payment is by means of EMI but an EMI is arrived
at by dividing the EAI by 12. The EAI is calculated assuming that the loan
amount is payable at the end of the year (ie on an
annual rest basis), even though they are actually payable every month. Earlier
schemes of housing finance were based on this method. For example, the annual report
of HDFC Ltd. For the financial year 2008-2009 states under Significant
Accounting Policies relating to Interest on Housing Loans that "…interest
on loans is computed either on an annual rest or on a monthly rest
basis..." For shorter tenure loans (up to ten years), the differential may
be as high as two percent more as compared to monthly reducing balance method.
This method may suit a borrower who may not be certain of generating monthly
cash flows with regularity although his business may be profitable.
The writer is the director of DMS Financial Services P. Ltd
Starting this week, Brick by Brick will give
readers a simple definition of day-to-day financial terms