How an EMI is calculated
EMI stands for Equated Monthly Instalment — the fixed amount you pay the lender every month until the loan is cleared. Each instalment covers two things: the interest due for that month on the outstanding balance, and a part of the principal. Because the balance shrinks every month, the interest portion falls and the principal portion rises, even though the EMI itself stays constant.
The EMI depends on three inputs: the loan principal (P), the monthly interest rate (r), and the number of monthly instalments (n). The annual rate you quote is divided by 12 to get the monthly rate, and the tenure in years is multiplied by 12 to get the number of payments.
The EMI formula
EMI = P × r × (1 + r)ⁿ ÷ [ (1 + r)ⁿ − 1 ]
where:
- P = loan principal
- r = annual interest rate ÷ 12 ÷ 100 (the monthly rate as a decimal)
- n = loan tenure in years × 12
Total payment is simply EMI × n, and total interest is total payment − principal.
Worked example
Suppose you take a home loan of ₹35,00,000 at 8.5% per annum for 20 years.
- Monthly rate r = 8.5 ÷ 12 ÷ 100 = 0.0070833
- Number of payments n = 20 × 12 = 240
- (1 + r)²⁴⁰ ≈ 5.4406
Plugging in: EMI = 3,500,000 × 0.0070833 × 5.4406 ÷ (5.4406 − 1) ≈ ₹30,377 per month.
Over 20 years you pay 240 × ₹30,377 ≈ ₹72,90,480 in total, of which roughly ₹37,90,480 is interest — more than the original loan amount. That is why the tenure matters so much: stretch the same loan to 30 years and the EMI drops, but the lifetime interest balloons.
Common mistakes to avoid
- Judging affordability by EMI alone. Lenders cap your EMI at roughly 40–50% of net income, but you should also keep an emergency buffer.
- Ignoring processing fees and insurance. These add to the real cost and are not in the EMI.
- Forgetting prepayment benefits. On a floating-rate home loan there is usually no prepayment penalty for individuals — prepaying early, when the interest share is highest, saves the most.
Use the schedule above to see exactly how much of each year's payments go to interest versus principal, and experiment with the tenure slider to find the balance between a comfortable EMI and a sensible total interest bill.