What is Loan?
A loan is a type of debt taken out over time and must be repaid with interest. A loan is taken from a financial institution such as a bank, credit union, or online lender. Depending on the loan type, the borrower must provide collateral or a down payment to secure the loan.
Loans can be used for various purposes, such as purchasing a car, financing a home, paying for college tuition, or covering personal or business expenses. The terms and circumstances of the loan, such as the interest rate, repayment plan, and associated costs, must be accepted by the borrower before the loan may be approved.
The interest rate on a loan will depend on the borrower’s creditworthiness and credit score. Generally speaking, the lower the interest rate, the higher the borrower’s credit score. Shopping around for the best loan terms is essential, as rates and terms vary significantly between lenders.
When taking out a loan, it is essential to ensure that the loan payments are affordable and can be met. Missing payments or defaulting on the loan can have serious consequences, damaging the borrower’s credit score and resulting in additional fees.
What is EMI?
EMI stands for Equated Monthly Installment. It is a fixed amount of money the borrower pays to the lender at a specified monthly date. The EMI comprises the principal amount borrowed and the interest due on the loan. It is used to pay off loans taken from financial institutions and banks.
The EMI is calculated by dividing the loan amount by the months in which the loan has to be repaid. The EMI is paid through post-dated cheques or ECS (electronic clearing system) directly from the borrower’s bank account.
The main advantage of opting for an EMI is the convenience of making fixed payments every month, helping in budgeting and planning better for the borrower. It also helps reduce the loan’s overall cost since the interest amount is spread through the tenure of the loan. However, there are some disadvantages too. The borrower has to pay the EMI even if the income is insufficient, which could lead to defaulting on the loan.
Difference Between Loan and EMI
- The loan is a lump sum borrowed from a lender and is to be repaid with interest over time, whereas EMI is a fixed amount paid each month to pay back the loan.
- The loan has a fixed interest rate, whereas EMI may have a variable interest rate.
- Loans can be taken from financial institutions such as banks, whereas EMI is taken from non-banking lenders such as retail stores.
- The loan is a one-time transaction, and the borrower must pay the entire amount at once, whereas EMI is a series of payments made periodically over time.
- Loan approval is based on credit score, whereas EMI approval is based on the borrower’s income and ability to pay the monthly installments.
Comparison Between Loan and EMI
| Parameters of Comparison | Loan | EMI |
| Meaning | Money given to the customer by the bank for future repayment | EMI (Equated Monthly Instalments) is the transactional method to pay back the loan |
| Preferred to | Availed by the customer to purchase high-value items | Preferred by the customer to pay back the loan availed |
| Deciding factors | Decided on factors like income status, borrower’s age, the value of the collateral credit status | Decided based on the loan amount, interest rate, and term duration. |
| Type of functionality | A transaction where the money is received | A transaction where the money is paid back |
| Collateral | Requires collateral security | No security |