What is EMI?

EMI is an acronym for Equated Monthly Installment. It is the amount payable every month to the bank or any other lender until the loan amount is fully paid off. It consists of the interest on the outstanding balance as well part of the principal amount to be repaid. The sum of principal amount and interest is divided by the tenure, i.e., number of months, in which the loan has to be repaid. The interest component of the EMI would be larger in the initial months and gradually reduce when compared to the principal amount. This is because interest is charged only on the balance outstanding. This is known as reducing balance method. Although the monthly payment amount remains the same throughout the loan tenure, with each successive payment you’ll pay more toward the principal and less in interest.

What is amortization?

Amortization in general is the depreciation of intangible assets. In the context of loan, amortization means an arrangement where equal monthly installments are made to pay the loan along with the interest. Each equal payment paid goes towards principal as well as interest. Amortization table shows the amount paid towards these two components over the time. Therefore learning how amortization schedule works is important to understand how your loan is repaid.

What is personal loan? How is it different from other loans?

Personal loan is a short term loan – on an average 3 years – extended to an individual irrespective of what need it is being used for. In banking parlance, it’s an unsecured loan where a consumer doesn’t have to provide any collateral to avail this loan. This loan is purely given on the basis of consumer’s credit profile and the financials he/she provides. The interest rate of personal loans are generally higher when compared to secured loans such as home loans and car loans.

What is CIBIL?

CIBIL – acronym for Credit Information Bureau (India) Limited – is India’s first credit information bureau. It acts as a database of credit history of borrowers. CIBIL provides this information to its members (lenders) in the form of credit information reports (CIR). The borrower should have a good CIBIL score to be able to get his loan approved.

What is Repo Rate?

When banks have any shortage of funds they can borrow it from RBI or any other bank. The rate at which RBI lend money to commercial banks is called repo rate. When the repo rate increases the borrowing from RBI becomes more expensive; in the same way, reduction in the repo rate makes borrowing cheaper for commercial banks.

What is Reverse Repo Rate?

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI.  The RBI increase reverse repo rate when it feels there is too much money floating in the banking system.  An increase in the reverse repo rate  means that the RBI will borrow money from the banks at a higher rate  of interest. As a result, banks would prefer to keep their money with the RBI.

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