Which of the following are correct about equated monthly installments (EMI)?
(A) The EMI depends on principal borrowed, rate of interest and tenure of the loan.
(B) It is a fixed amount made by borrower to the lender every month.
(C) The interest remains constant for every EMI in reducing balance method.
(D) As we pay off our loan, the outstanding principal amount decreases with every EMI in reducing balance method.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (B) and (D) only
For a loan P at rate i per month for n months, the EMI is
\( \displaystyle \text{EMI} = \frac{P\,i\,(1 + i)^n}{(1 + i)^n - 1} \)
In the reducing balance method, each EMI first pays the interest on the outstanding principal, and the rest of it repays principal.
(A) The EMI depends on principal borrowed, rate of interest and tenure of the loan. — Correct. The formula contains exactly P, i and n.
(B) It is a fixed amount made by borrower to the lender every month. — Correct. The EMI is the same every month.
(C) The interest remains constant for every EMI in reducing balance method. — Incorrect. The interest is charged on the outstanding principal, which falls after every EMI. So the interest part decreases and the principal part increases, while the EMI stays fixed.
(D) As we pay off our loan, the outstanding principal amount decreases with every EMI in reducing balance method. — Correct. Part of every EMI repays principal.