An Equated Monthly Instalment (EMI) is the fixed payment you make each month to repay a loan. It covers both principal and interest, keeping repayments constant throughout the loan term.
The EMI Formula
EMI = P × r × (1 + r)^n / ((1 + r)^n − 1)
Where:
- P = Principal (loan amount)
- r = Monthly interest rate = Annual rate ÷ 12 ÷ 100
- n = Total number of monthly payments (loan term in months)
Worked Example
Loan: ₹10,00,000 (₹10 lakh) | Rate: 9% per annum | Term: 5 years (60 months)
r = 9 / 12 / 100 = 0.0075
n = 60
EMI = 10,00,000 × 0.0075 × (1.0075)^60 / ((1.0075)^60 − 1)
(1.0075)^60 = 1.5657
EMI = 10,00,000 × 0.0075 × 1.5657 / (1.5657 − 1)
EMI = 11,742.75 / 0.5657
EMI = ₹20,758
EMI Breakdown Over Time
Early EMIs are mostly interest. As the loan progresses, more goes to principal.
| Month | EMI | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | ₹20,758 | ₹7,500 | ₹13,258 | ₹9,86,742 |
| 12 | ₹20,758 | ₹6,408 | ₹14,350 | ₹8,54,069 |
| 30 | ₹20,758 | ₹4,651 | ₹16,107 | ₹6,19,784 |
| 60 | ₹20,758 | ₹154 | ₹20,604 | ₹0 |
Total Interest Paid
Total paid = EMI × n = ₹20,758 × 60 = ₹12,45,480
Total interest = ₹12,45,480 − ₹10,00,000 = ₹2,45,480
How Rate and Term Affect EMI
On a ₹10 lakh loan:
| Rate | 3 years | 5 years | 10 years |
|---|---|---|---|
| 7% | ₹30,877 | ₹19,801 | ₹11,611 |
| 9% | ₹31,799 | ₹20,758 | ₹12,668 |
| 12% | ₹33,214 | ₹22,244 | ₹14,347 |
Longer terms reduce the EMI but dramatically increase total interest paid.
Prepayment and Foreclosure
Most lenders allow part-prepayments. Every additional payment directly reduces the principal, which:
- Shortens the loan term (if EMI stays the same)
- Or reduces EMI (if term stays the same)
Rule of thumb: Even a single extra EMI per year can cut 1–2 years off a 20-year home loan.
Types of Loans That Use EMI
- Home loans
- Car loans
- Personal loans
- Education loans
- Consumer durables (mobile, appliance EMIs)