What is an EMI?
An **EMI (Equated Monthly Installment)** is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. The purpose of an EMI is to steadily pay down a loan balance over a set number of years, covering both the interest accrued and the principal balance.
The Loan EMI Formula
Most banks and financial institutions calculate EMIs using the **reducing balance method**. The mathematical formula is:
Where the variables represent:
- P (Principal): The total loan amount borrowed (e.g., Rs 5,00,000).
- r (Monthly Interest Rate): The annual interest rate divided by 12, then divided by 100. (For example, an annual rate of 12% equals a monthly rate of 0.01).
- n (Tenure in Months): The number of monthly installments over the loan term (e.g., 5 years = 60 months).
Example Amortization Breakdown
Let us calculate the EMI for a loan of Rs 5,00,000 at an annual interest rate of 10% for a tenure of 5 years (60 months):
- P = 500,000
- r = 10 / 12 / 100 = 0.008333
- n = 60
- EMI calculation yields: Rs 10,623.52 per month
- Total Interest Paid: Rs 1,37,411.37
- Total Repayment Amount: Rs 6,37,411.37
During the first month, your interest charges are calculated on the full principal: 500,000 × 0.008333 = Rs 4,166.67. This means that out of your Rs 10,623.52 EMI, only Rs 6,456.85 goes toward reducing your loan balance.
In the second month, the interest is calculated on the remaining balance (Rs 4,93,543.15), which lowers the interest charge and increases the principal repayment segment. This progression is known as amortization.
How to Plan Repayments Easily
Instead of processing complex formula exponents manually, you can use our interactive tool:
- Open our free EMI Calculator.
- Adjust the sliders or type in your Principal, Interest Rate, and Tenure.
- Review the monthly and yearly amortization tables to check your interest paydown schedule.