ChequeMan Blog

Smart and Easy Cheque Printing Software

Monthly Archives: July 2014

Equated Monthly Installments (EMI)

EMI

EMI stands for Equated Monthly Installments.  EMI is monthly basis repayment of the loan amount taken. The loan amount can be home loan, car loan or personal loan that is paid back through a series of monthly payments. EMI is in the form of post dated cheques drawn in favour of lender. They are paid until the total amount due is paid up. If loan amount increases the EMI amount increases too and if time period increases the EMI amount decreases.

How is EMI calculated?

EMI is made up of two variable components- principal amount and interest rate. The EMI is fixed but not the components. The component of interest amount is higher in initial years and decreases over the years. The component of principal amount is lower in initial years and increases over the years.

For this reason, if you consider pre-payment, you should do it in early years as you save on interest rate.

 

What is the difference between Bank Guarantee and Letter of Credit

A bank guarantee and a letter of credit are similar in many ways but they’re two different things. Letters of credit ensure that a transaction proceeds as planned, while bank guarantees reduce the loss if the transaction doesn’t go as planned.

Bank Guarantee:

The bank guarantees a sum of money to a beneficiary. The sum is only paid by the bank if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.

A bank guarantee might be used when a buyer obtains goods from a seller then runs into cash flow difficulties and can’t pay the seller. The bank guarantee would pay an agreed-upon sum to the seller. Similarly, if the supplier was unable to provide the goods, the bank would then pay the purchaser the agreed-upon sum. Essentially, the bank guarantee acts as a safety measure for the opposing party in the transaction.

Letter of Credit:

It is an obligation taken on by a bank to make payment once the certain criteria are met. Once the terms are met and confirmed the bank transfers the funds. It ensures that till the conditions are met, payment will be made.

The letter of credit Is to be used in cases such as delivery of goods and completion of services. The seller asks the buyer to obtain the letter from the bank before the transaction occurs. The buyer purchases the letter and forwards it to seller’s bank. It substitutes the bank’s credit for that of the client, ensuring correct and timely payment.