When you apply for a insurance regardless of whether it is a personal insurance, home insurance or car insurance, the second most important aspect (the first is the interest rate) that you should consider is the monthly installment. It’s called an EMI because it’s the same amount you have to pay each month in order to pay off your insurance. This system is completely hassle free, because you have to contribute only what you can afford, and not use your entire savings or income to pay off your insurance.
The Monthly Equivalent Installment or EMI consists of two main components:
- Base amount
- Interest rate
Before we try to understand how this works, let’s go over some of the terms commonly used in relation to emi.
Principal amount: The original value of the borrowed amount.
– Interest rateThe rate charged by the bank annually
– a periodThe period during which the insurance must be repaid.
– Processing cost: A small percentage of your insurance amount (less than 3%) which is in proportion to the bank’s efforts to process your insurance application.
In the initial repayment period, your interest will make up a large portion of your EMI, while at the end of the insurance period, your interest will count towards zero and your EMI will primarily consist of the principal amount.
For example, if you borrow a personal insurance of 5,000 pounds, for 3 years at an interest rate of 15%, your EMI will be 17,333. In the first month, you will pay 11,083 as principal and 6,250 as interest. Similarly, at the end of the term, you will pay 17,119 in principal and 214 in interest.
The difference between fixed and diminishing rates
Now, I had used the EMI calculator to get a rough estimate of the EMI payable each month. Usually this is a file fixed interest rate That is, the rate of interest will not change during the period; Naturally, your emi code will remain the same for each month.
However, if you have chosen a file decreasing rate chart, it means that your interest rate will be calculated based on the current insurance outstanding at a certain point during the term. Of course, as soon as the interest decreases, the value of the emi will also decrease. In fact, the decreasing rate of interest provides more avenues for saving on exorbitant interest charges.
If you have ever taken out a home insurance, you have come across another term called floating rateThis will change depending on the market, it doesn’t have to be an increase all the time, there are also chances of a rate cut. Maintain a window of 1% to 3% of the difference from the current rate. When you take this into account and calculate your EMI, you will be in a better position to get a general idea of how much you will be asked to pay now, and how much you might have to pay if there is a change.
Aside from the change in interest rates, when taking advantage of the partial payment or pre-closing facility, you may have to pay a separate fee for it. You can also include this fee when using the EMI calculator.