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How EMI is Calculated — Formula, Example & Amortization Explained

EMI (Equated Monthly Installment) is the fixed monthly amount a borrower pays to a lender over the entire loan tenure. It includes both a principal component and an interest component — though the proportion of each changes every month.

The EMI Formula

The standard EMI calculation uses the reducing-balance compound interest method:

EMI = P × r × (1+r)ⁿ / ((1+r)ⁿ − 1)

Where P is the principal loan amount, r is the monthly interest rate (annual rate divided by 12 and by 100), and n is the total number of monthly installments.

Principal vs Interest in Each Payment

In the early months, the interest component is higher because the outstanding balance is large. As you pay down the principal, the interest portion decreases and the principal portion increases. This is called amortization.

For example, on a ₹20 lakh loan at 9% p.a. for 10 years, the first EMI might include ₹7,000 in interest and ₹5,000 in principal. By the final year, the same EMI might include only ₹900 in interest and ₹11,100 in principal.

What Affects Your EMI?

Three factors determine your EMI: the loan amount (higher amount = higher EMI), the interest rate (higher rate = higher EMI and more total interest paid), and the tenure (longer tenure = lower EMI but significantly more total interest paid over the life of the loan).

Extending your tenure from 10 to 20 years on a ₹30 lakh loan at 8.5% reduces the monthly payment, but can double the total interest paid.

Prepayments and How They Help

A prepayment is an extra lump-sum payment towards the outstanding principal. Because it reduces the principal balance, all future interest calculations are based on the lower amount. A ₹1 lakh prepayment made in the 3rd year of a 20-year home loan can save several lakhs in total interest and shorten the tenure by years.

Example

Home Loan Calculation

Loan: ₹30,00,000. Interest rate: 8.5% p.a. Tenure: 20 years (240 months). r = 8.5 / 12 / 100 = 0.007083 n = 240 EMI = 3000000 × 0.007083 × (1.007083)^240 / ((1.007083)^240 − 1) ≈ ₹26,035/month Total payable: ₹62,48,400. Total interest: ₹32,48,400.

Practical notes

  • •Actual EMIs from lenders may differ slightly due to rounding conventions used in their loan management systems.
  • •Processing fees, insurance premiums, and prepayment charges are not part of the EMI formula.

Try the tools

EMI & Loan Amortization CalculatorCompound Interest CalculatorPercentage Calculator

Frequently asked questions

Is EMI calculated on the original loan amount or the outstanding balance?

The EMI amount is fixed throughout the tenure (for a fixed-rate loan). However, the interest portion of each EMI is calculated on the remaining outstanding balance — this is why interest decreases and principal increases over time.

Can I reduce my EMI after taking a loan?

Some lenders allow you to make a prepayment and then choose between reducing the EMI or reducing the tenure. Reducing the tenure saves more interest overall.

What is a moratorium period?

A moratorium is a period at the start of the loan where no EMI is due. Interest usually continues to accrue during this time and is added to the principal.

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