What is EMI?
An Equated Monthly Installment (EMI) is a fixed payment made by a borrower to a lender at a specified date each calendar month. EMIs apply to both interest and principal, so that over a specified number of years, the loan is fully paid off. Interest is computed using reducing balance calculations.
Equated Monthly Installment (EMI) is the amount payable every month to the bank or any other financial institution until the loan amount is fully paid off. It consists of two parts: the interest on the outstanding loan amount and the principal repayment. As the tenure progresses, the interest portion reduces while the principal portion increases.
Each monthly payment reduces a tiny part of the principal and handles the interest charges for that period. Because banks compound reducing balance interest, your earliest payments go mostly toward interest.
Formula
Loan EMIs are calculated using the reducing balance method. The interest portion of the EMI is computed on the outstanding principal balance, which decreases with every monthly repayment.
Reducing Balance Amortization Formula:
EMI = P × r × (1 + r)^n / [(1 + r)^n − 1] P = loan principal r = monthly interest rate (annual rate ÷ 12 ÷ 100) n = total months (tenure in years × 12)
Worked Example
Worked Example Model:
- Loan Principal (P): ₹10,00,000
- Interest Rate (R): 10% p.a.
- Tenure (Y): 5 Years (60 months)
Steps:
- Determine monthly interest rate (r) = 10% / 12 / 100 = 0.008333.
- Calculate total number of monthly payments (n) = 5 years * 12 months = 60 months.
- Apply the amortization formula: EMI = P * r * (1+r)^n / ((1+r)^n - 1).
- Compute: (1.008333)^60 = 1.6453.
- Multiply: EMI = ₹10,00,000 * 0.008333 * 1.6453 / (1.6453 - 1) = ₹21,247.
Monthly EMI: ₹21,247. Total Interest: ₹2,74,823. Total Payment: ₹12,74,823.
How to use this calculator
Input your desired loan amount, interest rate (p.a.), and loan tenure in years. The calculator will immediately compute the monthly EMI, total interest payable, and total amount returned to the lender over the loan term.
Input your desired loan amount, interest rate (p.a.), and loan tenure in years. The calculator will immediately compute the monthly EMI, total interest payable, and total amount returned to the lender over the loan term.
Adjust the sliders to test various scenarios. A larger down payment or a shorter term substantially lowers the total interest paid.