How EMI Is Calculated: The Loan Formula Explained with Examples

An EMI (equated monthly instalment) is the fixed amount you pay every month on a loan. It covers part of the interest and part of the loan itself, and it stays the same until the loan is repaid. Here's exactly how banks work it out.

The EMI formula

EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1)

• P is the principal, the amount you borrow.
• r is the monthly interest rate: the annual rate ÷ 12 ÷ 100.
• n is the number of monthly payments.

A worked example

Say you borrow 1,000,000 at 12% a year for 5 years.

• P = 1,000,000
• r = 12 ÷ 12 ÷ 100 = 0.01
• n = 5 × 12 = 60

(1.01)^60 is about 1.8167, so:

EMI = 1,000,000 × 0.01 × 1.8167 ÷ (1.8167 − 1) ≈ 22,244 a month.

Over 60 months you pay about 1,334,670 in total, so the interest costs roughly 334,670.

You don't need to do this by hand: the loan calculator does it instantly and shows the full repayment schedule.

Why most of your early EMIs go to interest

Each month, interest is charged on the balance still owed. At the start the balance is highest, so interest takes a bigger share of the EMI. As the balance falls, more of each payment reduces the principal.

Month	Interest part	Principal part	Balance left
1	10,000	12,244	987,756
2	9,878	12,367	975,389
30	about 5,900	about 16,340	about 574,100
60	about 220	about 22,020	0

That's why paying extra early in a loan saves so much interest.

What changes your EMI

Interest rate. On the example above, every 1% increase in the rate adds roughly 500 to the monthly EMI and about 30,000 to the total interest.

Tenure. A longer loan lowers the EMI but raises the total interest.

Tenure	EMI	Total interest
3 years	about 33,214	about 195,700
5 years	about 22,244	about 334,700
7 years	about 17,653	about 482,800

Down payment. Borrowing less lowers both the EMI and the interest. For a car, a larger down payment also reduces the risk of owing more than the car is worth.

Prepayments: the biggest money-saver

If your loan allows prepayment, paying an extra lump sum reduces the principal directly. You can then either keep the same EMI and finish earlier, which saves the most interest, or keep the same end date with a smaller EMI. Check for prepayment charges first, as some lenders charge a fee.

Flat rate vs reducing balance

Some lenders, especially for car and consumer loans, quote a flat rate: interest is charged on the original amount for the whole term, even as you pay it down. A 7% flat rate costs much more than 7% on a reducing balance, roughly the same as 12–13% reducing. Always ask which method is used, or compare the total amount payable.

Islamic financing

Islamic banks use structures such as murabaha or diminishing musharakah instead of interest, but the monthly instalment is still calculated from a profit rate in a similar way. Comparing the total amount payable is the fairest way to compare offers.

Try it yourself

Use the loan calculator for personal loans, the auto loan calculator for cars, and the mortgage calculator for home loans. Change the rate and tenure to see how much each option really costs before you sign.