I was running some numbers thru an EMI calculator and was surprised at some of the results, so I thought why not play a little game with the bloggers and have some fun.
Q-1.
Assuming a principal of 10L, interest rate of 12% and repayment of 20 years, how much of the EMI payment would go towards interest at the end of 5 years ?
Interest paid
A) 2.52 L
B) 3.85 L
C) 5.78 L
D) EMI = equal interest and principal payments so does not matter.
Q-2.
Now if a US homeowner borrowed the same at 6% what would be the result
A) 1.20 L
B) 2.78 L
C) 3.21 L
D) Half of the answer of Q-1
The answer as some people have pointed out is C for Q1 and B for Q2. The black magic of the EMI is responsible for a payment of more then 500% of the EMI towards interest as opposed to principal. After 5 years the borrower wouldve paid 80k as principal and 5.8L as interest. At the end of 10 years the principal payment is 2.3L as opposed to the interest of 10.8 L. After 15 years, you have finally paid of 1/2 the principal and 15L as interest. At 20 years you have paid off the 10L principal and 16.4L as interest.
Now for an average apt of 1crore in Mumbai with 10% down lets do the numbers for 90L loan. Here I wouldve paid an interest of 1.4 crores for a 90L loan and god forbid if I couldn't make the EMI after 5 years and had to sell the apt I wouldve paid 52L as interest with 7L as principal and the house would have to be worth atleast 1.4 crores to break even.
The EMI method of loan repayment is one of the worst methods of calculation and benefits the banks the most, leaving the borrower shackled in loans forever. As finance professionals will tell you, there are many ways of calculating interest where interest and principal are paid off in equal chunks per payment. Here the interest payment is drastically reduced due to the reducing principal. Unfortunately the bank has no interest (pun not intended) in principal payments and all they care about is the interest.
Q-1.
Assuming a principal of 10L, interest rate of 12% and repayment of 20 years, how much of the EMI payment would go towards interest at the end of 5 years ?
Interest paid
A) 2.52 L
B) 3.85 L
C) 5.78 L
D) EMI = equal interest and principal payments so does not matter.
Q-2.
Now if a US homeowner borrowed the same at 6% what would be the result
A) 1.20 L
B) 2.78 L
C) 3.21 L
D) Half of the answer of Q-1
The answer as some people have pointed out is C for Q1 and B for Q2. The black magic of the EMI is responsible for a payment of more then 500% of the EMI towards interest as opposed to principal. After 5 years the borrower wouldve paid 80k as principal and 5.8L as interest. At the end of 10 years the principal payment is 2.3L as opposed to the interest of 10.8 L. After 15 years, you have finally paid of 1/2 the principal and 15L as interest. At 20 years you have paid off the 10L principal and 16.4L as interest.
Now for an average apt of 1crore in Mumbai with 10% down lets do the numbers for 90L loan. Here I wouldve paid an interest of 1.4 crores for a 90L loan and god forbid if I couldn't make the EMI after 5 years and had to sell the apt I wouldve paid 52L as interest with 7L as principal and the house would have to be worth atleast 1.4 crores to break even.
The EMI method of loan repayment is one of the worst methods of calculation and benefits the banks the most, leaving the borrower shackled in loans forever. As finance professionals will tell you, there are many ways of calculating interest where interest and principal are paid off in equal chunks per payment. Here the interest payment is drastically reduced due to the reducing principal. Unfortunately the bank has no interest (pun not intended) in principal payments and all they care about is the interest.
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