How EMI is calculated
EMI (equated monthly instalment) is a fixed amount that repays both interest and principal over the loan tenure. Banks in India use this formula:
EMI = P × r × (1 + r)n ÷ ((1 + r)n − 1)
Here P is the loan amount, r is the monthly interest rate (annual rate ÷ 12 ÷ 100) and n is the number of monthly instalments.
Worked example
For a loan of ₹10,00,000 at 10.5% for 5 years: r = 10.5 ÷ 1200 = 0.00875 and n = 60. The EMI comes to ₹21,494. Over 60 months you pay ₹12,89,634, so the interest is ₹2,89,634.
Three things that change your EMI
- Amount: EMI rises in direct proportion. Borrow 20% less and the EMI falls by 20%.
- Rate: on long loans, small changes matter. On a ₹40 lakh, 20-year loan, every 0.5% adds roughly ₹1,276 a month.
- Tenure: a longer tenure lowers the EMI but raises total interest, often by lakhs.
Should you prepay?
If your loan rate is higher than what your savings safely earn after tax, prepaying is a guaranteed return at the loan rate. Prepayments early in the loan save the most because that is when interest is highest. Keep an emergency fund of 6 months’ expenses before you prepay.
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Questions people ask
Does a prepayment reduce my EMI or my tenure?
Banks usually keep the EMI the same and shorten the tenure, which saves the most interest. You can ask them to lower the EMI instead. This calculator shows the tenure-reduction case.
Is there a penalty for prepaying a loan?
Not on floating-rate loans taken by individuals: RBI bars banks and NBFCs from charging prepayment or foreclosure fees on them. Fixed-rate loans and business loans can still carry a charge, usually 2–4%.
Why does most of my early EMI go to interest?
Interest is charged on the balance you still owe. In the first years the balance is highest, so interest takes the bigger share. As the balance falls, more of each EMI repays principal. The year-by-year table shows this shift.
What is a reducing balance rate?
It means interest is charged only on the amount still unpaid, recalculated every month. All bank home, car and personal loans in India use it. A “flat rate” quoted by some dealers charges interest on the original amount for the whole term and costs much more than the same number on a reducing basis.