The EMI formula looks complex, but it simply spreads principal and interest into equal monthly payments. Understanding it helps you check lender quotes and plan prepayments.
Key takeaways
- EMI = P × r × (1+r)^n ÷ [(1+r)^n − 1]
- r is the monthly rate (annual rate ÷ 12 ÷ 100).
- Early EMIs are mostly interest; later EMIs are mostly principal.
- A flat-rate loan is far costlier than the same "reducing" rate.
Step-by-step example
Loan ₹3,00,000, 12% a year, 2 years.
- r = 12 ÷ 12 ÷ 100 = 0.01
- n = 24
- (1 + r)^n = 1.01^24 ≈ 1.2697
- EMI = 3,00,000 × 0.01 × 1.2697 ÷ (1.2697 − 1) ≈ ₹14,122
- Total paid ≈ ₹3,38,929 → interest ≈ ₹38,929
First three months of the schedule
| Month | Opening | Interest | Principal | Closing |
|---|---|---|---|---|
| 1 | ₹3,00,000 | ₹3,000 | ₹11,122 | ₹2,88,878 |
| 2 | ₹2,88,878 | ₹2,889 | ₹11,233 | ₹2,77,645 |
| 3 | ₹2,77,645 | ₹2,776 | ₹11,346 | ₹2,66,299 |
Flat rate vs reducing rate
A "12% flat" loan charges ₹36,000 a year on the original ₹3 lakh → ₹72,000 interest over 2 years, almost double. Its equivalent reducing rate is roughly 21–22%.
Your action checklist
- Use the calculator with your exact loan or deposit details.
- Change one input at a time to see its effect.
- Add fees, taxes and charges that the calculator ignores.
- Compare the total rupee cost or return, not only the rate.
- Save the results and recheck when rates change.
FAQs
Why is my bank's EMI slightly different?
Banks may use daily interest calculation, broken-period interest or rounding.
Does prepayment change EMI or tenure?
You can usually choose; reducing tenure saves more interest.
Try the EMI calculator.
