How Is EMI Calculated? The Loan EMI Formula Explained
When you take a home, car or personal loan, the bank asks you to repay it in equal monthly instalments called EMIs. The amount looks like it comes out of nowhere, but it follows a standard formula. Knowing how it works lets you compare offers properly, see why a longer tenure costs more and decide whether prepaying is worth it.
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 divided by 12, and by 100 to turn the percentage into a decimal. A 9% annual rate gives r = 0.0075.
- n is the number of monthly instalments. A 5-year loan has n = 60.
This formula assumes the reducing-balance method, which is how most banks in India charge interest on home, car and personal loans. Interest each month is charged only on the amount you still owe, so it falls as you repay.
A worked example
Suppose you borrow ₹10,00,000 at 9% a year for 5 years. Then P = 10,00,000, r = 0.0075 and n = 60. Plugging these into the formula gives an EMI of about ₹20,758.36. Over 60 months you will pay ₹12,45,501.31 in total, which means ₹2,45,501.31 is interest.
In the first month, the interest is 10,00,000 × 0.0075 = ₹7,500. The rest of the EMI, ₹13,258.36, reduces the principal. Next month the interest is calculated on the smaller balance, so a little more of the EMI goes to principal. This is why, early in a loan, most of what you pay is interest.
Calculate your EMI and see the full schedule →
How tenure changes the cost
A longer tenure makes the EMI smaller but costs far more in interest. Here is the same ₹10,00,000 loan at 9% over different periods:
| Tenure | Monthly EMI | Total interest |
|---|---|---|
| 3 years | ₹31,799.73 | ₹1,44,790.38 |
| 5 years | ₹20,758.36 | ₹2,45,501.31 |
| 7 years | ₹16,089.08 | ₹3,51,482.57 |
| 10 years | ₹12,667.58 | ₹5,20,109.29 |
Stretching from 5 to 10 years cuts the monthly burden by about ₹8,000 but more than doubles the interest. The right tenure is the shortest one you can afford comfortably.
How the rate changes the cost
Small differences in rate matter more than they look, especially on long loans. For a ₹50,00,000 loan over 20 years, an EMI at 8.5% is ₹43,391.16 and the total interest is ₹54,13,878.80. At 9.5% the EMI rises to ₹46,606.56 and the interest to ₹61,85,574.25, which is about ₹7.7 lakh more for a one percentage point difference.
Reducing balance versus flat rate
Some lenders and dealers quote a flat rate, where interest is calculated on the original amount for the entire tenure. A flat rate looks lower than a reducing-balance rate but costs more in practice, because you keep paying interest on money you have already repaid. When comparing offers, ask for the reducing-balance rate or compare the total amount repayable.
Practical tips
- Compare the total payment, not only the EMI. A low EMI can hide a long tenure.
- Check what is included. Processing fees, insurance and GST on fees are usually extra and are not part of the EMI formula.
- On floating-rate loans, the EMI or the tenure changes when the rate changes. Ask your lender which one.
- Part-prepayments reduce the principal, and early prepayments save the most interest, because interest is highest in the early years.
- Lenders often look at all your EMIs as a share of your monthly income when deciding how much to lend. Keeping that share modest leaves room for emergencies.
This guide is for general information and is not financial advice. Check the exact EMI, charges and terms with your lender before signing.
Tools mentioned in this guide
- Loan / EMI calculator: Calculate your monthly loan EMI, total interest and total repayment, with an optional month-by-month schedule.
- Compound interest / SIP calculator: See how savings or SIP investments can grow with compound interest over the years.
- Percentage calculator: Work out a percentage of a number, what percent one number is of another, percentage change, and increases or decreases.
- Tax / GST calculator: Add GST or sales tax to a price, or take it out of a tax-inclusive total, with an optional CGST/SGST split.