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On the Merits of Equated Monthly Installments Method of Term Financing: Some Analytics and Arithmetics

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  • S K Bose
  • D D Mukherjee

Abstract

The Equated Monthly Installments (EMI) based term financing has been found to be convenient by both the lending and borrowing communities, especially in the case of small ticket equipment financing. However, there remains considerable scope for clarity and understanding of the EMI mode of term financing. This paper summarizes the various responses received from borrowers as well as lenders on the EMI-related issues, identifies the areas requiring clarity and understanding, and then works out the formulation for EMIs in various periodicities of compounding with the common base of monthly reducing balance and monthly repayment of installments. All the EMI formulations are then reduced to a general formulation that can be applied to all such situations with a change in the value of variables. The paper then studies the impact of varying interest rates and varying periodicities of compounding on the EMIs and how the borrowers and lenders respond to such situations.

Suggested Citation

  • S K Bose & D D Mukherjee, 2009. "On the Merits of Equated Monthly Installments Method of Term Financing: Some Analytics and Arithmetics," The IUP Journal of Bank Management, IUP Publications, vol. 0(1), pages 73-93, February.
    • Handle: RePEc:icf:icfjbm:v:8:y:2009:i:1:p:73-93
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