Monthly rent System
Now you have decided to take the loan. But the question remains. Whom will you take it from? On what accounts will your decisions be based?

The usual, average loans are paid back with interest, in Equal Monthly Installments or EMI as they are popularly known. An EMI is a constant sum of money that is paid each month for a pre - specified number of months.
An EMI is divisible in 2 parts :

• Interest for one month on the principal amount which is outstanding at the end of the previous month, and

• A further repayment of the principal.

For example, if you took a loan of Rs.1 lakh repayable in twelve months at the rate of 16% p.a., the EMI would be Rs 9,073. In the first month, Rs. 1,333 of this would be interest (being the interest on Rs. 1 lac @ 16% for one month), and the remaining Rs. 7740 would go towards principal repayment, thereby reducing the principal to Rs. 92,260. So, for the second month, interest will be Rs. 1,230 (being the interest on Rs.92,260 @ 16% for one month), and the remaining Rs. 7,843 would go towards principal repayment. And so on.

The loan may be paid back by either the monthly rests or annual rest method.

In the monthly rest system, the interest for each month is charged on the principal left at the end of the last month.

An example would better explain the annual rest method. Suppose you have taken a loan of Rs. 2 lakhs. In the first year, you have repaid 20,000 of the principal. In the next year, your interest will be calculated on the remainder of the balance and not the entire 2 lakh. Whatever amount you will have paid during the course of that year will only be taken into account at the end of that year, and not before. Therefore, it is called the annual rest method.