A Loan EMI (Equated Monthly Installment) is a fixed monthly payment made by the borrower to the lender until the loan is fully repaid. It consists of two components:
Principal Amount – The original loan amount borrowed.
Interest Amount – The cost of borrowing money from the lender.
The EMI remains constant throughout the tenure of the loan in most cases unless you opt for a floating interest rate or make a prepayment.
✔ Home Loans
✔ Personal Loans
✔ Car Loans
✔ Education Loans
✔ Business Loans
The formula for calculating EMI is:
EMI = [P × r × (1 + r)n] / [(1 + r)n - 1]
Where:
P = Loan amount
r = Monthly interest rate (Annual interest rate / 12 / 100)
n = Loan tenure in months
Suppose you take a loan of ₹10,00,000 at an annual interest rate of 10% for 5 years.
Monthly Interest Rate = 10 / 12 / 100 = 0.0083
Tenure = 5 × 12 = 60 months
Using the formula, the EMI will be approximately ₹21,247 per month.
Many loans, especially home and car loans, use the reducing balance method, which ensures that interest is calculated on the remaining balance rather than the initial principal.
| Month | Principal Outstanding at the Beginning | EMI | Interest | Principal Repayment | Principal Outstanding at the End | % Loan Repaid |
|---|---|---|---|---|---|---|
| 1 | 5,000,000 | 48,251 | 41,667 | 6,584 | 4,993,416 | 0.13% |
| 2 | 4,993,416 | 48,251 | 41,612 | 6,639 | 4,986,776 | 0.26% |
| 3 | 4,986,776 | 48,251 | 41,556 | 6,695 | 4,980,082 | 0.40% |
| 4 | 4,980,082 | 48,251 | 41,501 | 6,750 | 4,973,332 | 0.53% |
| 5 | 4,973,332 | 48,251 | 41,445 | 6,806 | 4,966,526 | 0.67% |
| 6 | 4,966,526 | 48,251 | 41,389 | 6,862 | 4,959,664 | 0.81% |
| 7 | 4,959,664 | 48,251 | 41,330 | 6,921 | 4,952,743 | 0.96% |
| 8 | 4,952,743 | 48,251 | 41,273 | 6,978 | 4,945,765 | 1.10% |
| 9 | 4,945,765 | 48,251 | 41,214 | 7,037 | 4,938,728 | 1.25% |
| 10 | 4,938,728 | 48,251 | 41,156 | 7,095 | 4,931,633 | 1.40% |
| 11 | 4,931,631 | 48,251 | 41,097 | 7,154 | 4,924,477 | 1.51% |
| 12 | 4,924,477 | 48,251 | 41,037 | 7,214 | 4,917,263 | 1.65% |
| 13 | 4,917,263 | 48,251 | 40,977 | 7,274 | 4,909,989 | 1.80% |
| 14 | 4,909,989 | 48,251 | 40,917 | 7,335 | 4,902,655 | 1.95% |
| 15 | 4,902,655 | 48,251 | 40,855 | 7,396 | 4,895,259 | 2.09% |
| 16 | 4,895,259 | 48,251 | 40,794 | 7,457 | 4,887,802 | 2.24% |
| 17 | 4,887,802 | 48,251 | 40,732 | 7,519 | 4,880,282 | 2.39% |
| 18 | 4,880,282 | 48,251 | 40,669 | 7,582 | 4,872,700 | 2.55% |
| 19 | 4,872,700 | 48,251 | 40,606 | 7,645 | 4,865,055 | 2.70% |
| 20 | 4,865,055 | 48,251 | 40,542 | 7,709 | 4,857,346 | 2.85% |
| 21 | 4,857,346 | 48,251 | 40,478 | 7,773 | 4,849,573 | 3.01% |
| 22 | 4,849,573 | 48,251 | 40,413 | 7,838 | 4,841,735 | 3.17% |
| 23 | 4,841,735 | 48,251 | 40,348 | 7,903 | 4,833,832 | 3.32% |
| 24 | 4,833,832 | 48,251 | 40,282 | 7,969 | 4,825,863 | 3.48% |
| 25 | 3,200,000 | 50,000 | 40,000 | 10,000 | 3,150,000 | 10.00% |
| 26 | 3,150,000 | 49,000 | 39,500 | 9,500 | 3,100,000 | 9.50% |
| 27 | 3,100,000 | 48,500 | 39,000 | 9,000 | 3,050,000 | 9.00% |
| 28 | 3,050,000 | 48,000 | 38,500 | 8,500 | 3,000,000 | 8.50% |
| 29 | 3,000,000 | 47,500 | 38,000 | 8,000 | 2,950,000 | 8.00% |
| 30 | 2,950,000 | 47,000 | 37,500 | 7,500 | 2,900,000 | 7.50% |
| 31 | 2,900,000 | 46,500 | 37,000 | 7,000 | 2,850,000 | 7.00% |
| 32 | 2,850,000 | 46,000 | 36,500 | 6,500 | 2,800,000 | 6.50% |
| 33 | 2,800,000 | 45,500 | 36,000 | 6,000 | 2,750,000 | 6.00% |
| 34 | 2,750,000 | 45,000 | 35,500 | 5,500 | 2,700,000 | 5.50% |
| 35 | 2,700,000 | 44,500 | 35,000 | 5,000 | 2,650,000 | 5.00% |
| 36 | 2,650,000 | 44,000 | 34,500 | 4,500 | 2,600,000 | 4.50% |
| 37 | 2,600,000 | 43,500 | 34,000 | 4,000 | 2,550,000 | 4.00% |
| 38 | 2,550,000 | 43,000 | 33,500 | 3,500 | 2,500,000 | 3.50% |
| 39 | 2,500,000 | 42,500 | 33,000 | 3,000 | 2,450,000 | 3.00% |
| 40 | 2,450,000 | 42,000 | 32,500 | 2,500 | 2,400,000 | 2.50% |
| 41 | 2,400,000 | 41,500 | 32,000 | 2,000 | 2,350,000 | 2.00% |
| 42 | 2,350,000 | 41,000 | 31,500 | 1,500 | 2,300,000 | 1.50% |
| 43 | 2,300,000 | 40,500 | 31,000 | 1,000 | 2,250,000 | 1.00% |
✅ Lower interest burden over time
✅ Higher proportion of principal repayment as tenure progresses
✅ Ideal for long-term loans
Prepayment means repaying a part of the loan before the scheduled EMI payments. This can be done in two ways:
Partial Prepayment – Paying a lump sum amount to reduce the outstanding principal.
Full Prepayment – Paying off the entire loan before the tenure ends.
✔ Reduces total interest paid
✔ Shortens loan tenure
✔ Provides financial freedom sooner
✔ Some banks charge prepayment penalties
✔ Can impact short-term liquidity
Loans can have two types of interest rates:
Fixed Interest Rate – EMI remains the same throughout the tenure.
Floating Interest Rate – EMI changes based on market interest rates.
📌 Repo Rate Changes: When the central bank increases or decreases the repo rate, interest rates on loans fluctuate.
📌 Inflation: Higher inflation leads to higher interest rates.
📌 Credit Score: A higher credit score means lower interest rates.
Feature: Fixed Rate | Floating Rate
EMI Stability: Constant | Changes over time
Interest Rate: Higher | Lower initially
Beneficial When: Rates are expected to rise | Rates are expected to fall
1️⃣ Choose the Right Tenure – Shorter tenure saves interest, but increases EMI.
2️⃣ Use an EMI Calculator – Plan repayments effectively.
3️⃣ Make Prepayments When Possible – Reduce interest burden.
4️⃣ Maintain a Good Credit Score – Helps in negotiating better interest rates.
5️⃣ Compare Loan Offers – Different banks offer different rates.