How your loan EMI is calculated, with a worked example
An EMI looks like a single number, but it is the answer to a small piece of maths you can check yourself. Once you see how it works, loan offers become much easier to compare.
The formula
For a loan with a reducing balance, which is how almost all home, car and personal loans from banks work, the monthly instalment is:
EMI = P × r × (1 + r)n ÷ ((1 + r)n − 1)
- P is the amount you borrow (the principal).
- r is the interest rate per month: the yearly rate divided by 12, then by 100.
- n is the number of monthly payments: years × 12.
A worked example
Say you borrow ₹10,00,000 at 9% a year for 20 years.
- r = 9 ÷ 12 ÷ 100 = 0.0075
- n = 20 × 12 = 240
- EMI works out to about ₹8,997 a month.
Over 240 months you pay about ₹21,59,342 in total, so roughly ₹11,59,342 of that is interest. More than the loan itself.
What your first payment is made of
In month one the bank charges interest on the full balance: ₹10,00,000 × 0.0075 = ₹7,500. The rest of the EMI, about ₹1,497, reduces the loan. Next month the balance is a little lower, so the interest part is a little smaller and the principal part a little bigger. That is why early payments feel like they barely dent the loan.
How tenure changes things
Same loan, same 9% rate, different lengths:
| Tenure | Monthly EMI | Total interest | Total paid |
|---|---|---|---|
| 15 years | ₹10,143 | ₹8,25,680 | ₹18,25,680 |
| 20 years | ₹8,997 | ₹11,59,342 | ₹21,59,342 |
| 25 years | ₹8,392 | ₹15,17,589 | ₹25,17,589 |
A longer tenure lowers the monthly payment, which makes a loan easier to carry, but you pay interest for more months, so the total rises sharply. Going from 15 to 25 years drops the EMI by about ₹1,750 a month and adds roughly ₹6,90,000 in interest. Neither choice is wrong. They are different trade-offs, and it helps to see both.
Flat rate versus reducing rate
Some lenders, especially for small personal and vehicle loans, quote a flat rate. With a flat rate, interest is charged on the original amount for the whole term, even though you are repaying the balance every month.
Take ₹5,00,000 over 5 years at 10% flat. The interest is 5,00,000 × 10% × 5 = ₹2,50,000, so the EMI is (5,00,000 + 2,50,000) ÷ 60 = ₹12,500. The same EMI on a reducing-balance loan would correspond to a rate of roughly 17.3% a year. A flat 10% is nowhere near a reducing 10%. When you compare offers, always ask which kind of rate is being quoted.
What the EMI does not include
The EMI covers principal and interest. Processing fees, insurance, prepayment charges and taxes are separate, and banks may round the figure to the nearest rupee. So use the calculated EMI as a close estimate, then confirm the final number with the lender.
Using this to decide
- Try a few tenures and see where the monthly figure stops being comfortable, then pick the shortest tenure you can afford.
- Compare two offers side by side with the Loan Comparison Calculator.
- Planning a home loan? The Home Loan EMI Calculator and Loan Eligibility Calculator cover the next questions.
- For a vehicle, use the Car Loan Calculator.
Run your own numbers
Enter the amount, rate and tenure and see the EMI, total interest and the month-by-month schedule.
Open EMI Calculator