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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Debt Management and Loans

For a home loan on a reducing-balance basis with a fixed EMI, how does the composition of successive EMIs change over the loan tenure?

In a fixed-EMI reducing-balance loan, the interest component of each EMI falls over time and the principal component rises. This happens because interest is calculated on the shrinking outstanding balance while the total EMI remains constant.

  1. AInterest share rises and principal share falls
  2. BInterest share falls and principal share risesCorrect
  3. CBoth interest and principal shares stay constant
  4. DPrincipal share stays constant while interest share falls

Explanation

Interest is charged on the outstanding balance. As each EMI repays some principal, the balance falls, so the interest part declines and, because the EMI is fixed, the principal part rises. The reverse pattern describes a flat-rate or interest-first loan, not a standard reducing-balance EMI.

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