Home Financial & Banking Terms What is Interest component?

What is Interest component?

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Interest component

Interest component is the amount of interest that is being paid along with the principal while one is repaying his loan.

So while you are repaying a fixed amount of money towards a loan that you availed by way of EMI, you must understand that the full amount of EMI is not being adjusted with the principal. EMI consists of the interest of one month on the principal that is outstanding since paying the last EMI and a part of the interest.

Both the amounts of the interest amount that is being repaid and the amount of the principal that is being repaid back differs with every EMI, even though the EMI is the same for every month. As obvious, the amount interest component decreases with time, as the outstanding principal on which the interest is charged decreases with time while the amount of the principal that is repaid back increases with time.

For credit facilities like cash credit, demand loans, Banks at times provides the borrowers to pay only the interest component during the tenor of the loan and the actual principal that is availed on maturity. This is also true during the moratorium period in case of home loans and education loans.

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Sreya Ray is working as a Manager at State Bank of India. She is a voracious reader and a passionate writer. Her life is complete with her daughter and the support of her husband and the inspiration of her parents. Sreya loves multi-tasking and is a dreamer. If she don't create anything on a day,She feels that she had wasted my day.

1 COMMENT

  1. What is moratorium period? Could not get the inverse relation of the interest component decreasing while the principal amount increasing at the end of the tenure for which the loan is taken. Really wish the author could use some examples as in her previous articles to make the point clear.

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