Question 1

How is EMI calculated?

Accepted Answer

EMI (Equated Monthly Installment) is calculated using the formula: EMI = P × r × (1+r)^n / ((1+r)^n - 1), where P is the principal amount, r is the monthly interest rate, and n is the total number of monthly payments. This ensures equal payments throughout the loan tenure.

Question 2

What is an amortization schedule?

Accepted Answer

An amortization schedule is a detailed table showing each monthly payment broken down into principal and interest components, along with the remaining balance after each payment. Early payments have a higher interest portion, which gradually shifts to more principal over time.

Question 3

How does loan tenure affect total interest?

Accepted Answer

Longer loan tenures result in lower monthly payments but significantly higher total interest paid. For example, a $200,000 loan at 7% for 30 years costs about $279,000 in interest, while the same loan for 15 years costs only about $123,000 — saving over $156,000.

Question 4

What is the difference between fixed and variable interest rates?

Accepted Answer

Fixed-rate loans maintain the same interest rate throughout the loan period, providing predictable payments. Variable-rate loans have rates that can change based on market conditions, which may result in lower initial rates but carry the risk of rate increases over time.

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Frequently Asked Questions

How is EMI calculated?

What is an amortization schedule?

How does loan tenure affect total interest?

What is the difference between fixed and variable interest rates?

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