Banks and non-banking finance companies such as Bajaj Finserv provide home loans to applicants. The major component in these loans is the home loan principal amount, and the home loan interest. When a borrower pays their EMI, they are actually paying a part of the interest due on the outstanding loan amount, while the remainder goes for paying off the outstanding loan amount.
Therefore, the home loan principal amount is the amount of money the borrower has borrowed from the lender less whatever the borrower has already repaid. Whereas, interest is the amount of money the lender charges on top of the principal amount, and is calculated based on the home loan interest rate and the amount of the principal.
Once the borrower starts making EMI payments on their home loan, the amounts of interest and principal they pay change over the course of the loan. When the borrower takes a loan where they make repayments towards both the interest and principal payments, they will be paying most of the repayment towards interest at the beginning of the repayments and only a small amount goes towards repayment of the home loan principal amount. Use home loan EMI calculator to know the payable EMIs.
The lender usually works out the exact amount the borrower has to pay each month to pay off the loan in the term they have set. They actually amortize the schedule, which shows the amount going towards interest and the amount going towards principal repayments each month. In this schedule, the amount going towards paying off the principal gets progressively bigger every year at a faster rate.
Also Read: How to Calculate Home Loan EMI?