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How EMI Is Calculated: A Worked Example You Can Follow
When you look at a loan offer, one question comes up first: how much will I pay every month? That number is the EMI, short for equated monthly instalment. The lender gives it to you in seconds, but it helps to know where it comes from. The same loan can cost very different amounts depending on how long you take to repay it, and the EMI alone will not tell you that.
The formula
EMI = P × r × (1 + r)n ÷ ((1 + r)n − 1)
P is the amount you borrow. r is the interest rate per month: take the yearly rate, divide by 12, then divide by 100 to turn the percentage into a decimal. n is the number of monthly payments, which is the number of years times 12.
A worked example
Say you borrow Rs 500,000 at 12% a year and repay it over 3 years.
- P = 500,000
- r = 12 ÷ 12 ÷ 100 = 0.01
- n = 3 × 12 = 36
First work out (1 + r)n, which is 1.01 multiplied by itself 36 times. That comes to about 1.4308. Now put it in:
EMI = 500,000 × 0.01 × 1.4308 ÷ (1.4308 − 1) ≈ Rs 16,607
Over 36 months that adds up to about Rs 597,858. You borrowed 500,000, so the interest is about Rs 97,858.
Where each payment goes
Every EMI is the same size, but what is inside it changes. In the first month you owe interest on the whole 500,000, which is 1% of it: Rs 5,000. The rest of your payment reduces the loan. The next month the balance is lower, so the interest part is smaller and more of the payment goes to the loan itself.
| Month | Interest | Goes to the loan | Balance left |
|---|---|---|---|
| 1 | Rs 5,000 | Rs 11,607 | Rs 488,393 |
| 2 | Rs 4,884 | Rs 11,723 | Rs 476,670 |
| 3 | Rs 4,767 | Rs 11,840 | Rs 464,829 |
This is also why paying part of the loan early saves real money. Interest is charged on what you still owe, so a lower balance means less interest every month after that.
Reducing balance and flat rate are not the same
The formula above is the reducing balance method, where interest is calculated on the balance that is left. Some lenders and dealers quote a flat rate instead, where the interest is worked out on the full original amount for the whole period.
With a 12% flat rate on the same loan, the interest would be 500,000 × 12% × 3 = Rs 180,000. The total is Rs 680,000, which makes the EMI about Rs 18,889. Compare that with Rs 16,607 under reducing balance. Same 12% on paper, a much more expensive loan. Always ask which method a quoted rate uses.
A longer tenure lowers the EMI and raises the cost
Stretching the same loan over 5 years instead of 3 makes each payment smaller, which feels like a relief. The price is more interest.
The monthly payment drops by about Rs 5,485, but you pay roughly Rs 69,476 more in interest. If you can manage the higher instalment comfortably, the shorter loan is cheaper.
What an EMI figure leaves out
The calculation covers only the amount borrowed and the interest. Processing fees, insurance, taxes on those fees, late payment charges and early settlement charges are separate. Ask the lender for the full repayment schedule and a list of every charge before you sign.
Using the EMI calculator
Open the EMI calculator, enter the loan amount, the yearly interest rate and the number of years, and it shows the monthly EMI, the total interest and the total payment. Try two or three different tenures and compare the totals, not just the monthly figure.
A rule of thumb many people use is to keep all loan payments combined under roughly a third of monthly income. It is not a law, and your own situation may call for more caution. Pick the shortest tenure whose payment you can carry without stress.
Try the EMI calculator
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