How Loan EMI Is Calculated: Formula and Worked Example
EMI stands for Equated Monthly Instalment. It is the fixed amount you pay every month until a loan is fully repaid. Each payment covers part of the interest and part of the original amount borrowed.
The formula
EMI = P x r x (1 + r)n / ((1 + r)n - 1)
- P is the loan amount
- r is the monthly interest rate (annual rate divided by 12 and by 100)
- n is the number of monthly payments
Worked example
You borrow 1,000,000 at 12 percent per year for 12 months. The monthly rate is 0.01, and (1.01)12 is about 1.1268. So EMI = 1,000,000 x 0.01 x 1.1268 / 0.1268, which is about 88,849 per month. Over 12 months you pay about 1,066,186, so the total interest is roughly 66,186.
What changes your EMI
- Higher interest rate: a bigger monthly payment and more total interest.
- Longer term: a smaller monthly payment, but you pay more interest overall.
- Larger loan: the payment grows in proportion.
Before you borrow
Check for processing fees, early repayment charges and insurance, because they are not part of the basic formula. Your bank statement is the final authority on what you owe.
How a longer term changes the cost
Take the same loan of 1,000,000 at 12 percent per year, but over 24 months. The EMI falls to about 47,073, yet total interest rises to about 129,764, nearly double the 66,186 you pay over 12 months. A lower EMI feels easier, but it costs more in the end.
Reducing balance versus flat rate
The formula above assumes reducing balance, where interest is charged only on the amount still owed. Some lenders quote a flat rate, where interest is charged on the full original amount for the whole term. A flat 10 percent is much more expensive than a reducing 10 percent, so always ask which one applies.
Why early payments are mostly interest
At the start, your outstanding balance is at its highest, so most of each EMI goes to interest. As the balance falls, more of each payment reduces the principal. This is why paying a loan off early saves the most when done in the first years.
Checking affordability
Many advisers suggest keeping total monthly debt payments well under 40 percent of your take-home income, although the right level depends on your other expenses and savings.
Frequently asked questions
Can I repay a loan early?
Often yes, but some lenders charge a prepayment fee. Read your loan agreement before paying extra.
Does a larger down payment help?
Yes. It reduces the amount borrowed, which lowers both the EMI and the total interest.
Try your own numbers with our Loan EMI Calculator, or see how savings grow with the Compound Interest Calculator.