How EMI is calculated
Lenders in India use the reducing-balance method: each month you pay interest only on the loan that is still outstanding, and the rest of the EMI repays the loan itself.
EMI = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1)- P = loan amount
- r = monthly interest rate = yearly rate ÷ 12 ÷ 100
- n = number of monthly EMIs (years × 12)
Worked example: ₹10,00,000 at 8.5% a year for 20 years. r = 8.5 ÷ 12 ÷ 100 = 0.007083 and n = 240, which gives an EMI of about ₹8,678. Over 240 months you pay ₹20,82,846 in all — ₹10,82,846 of it is interest, more than the loan itself.
At 0% interest (as in many “no-cost EMI” offers) the EMI is simply the amount divided by the number of months. The cost is often hidden in a processing fee or a higher price, so compare the total you pay, not just the EMI.
Where each EMI goes
In the first EMI of the example, the interest is 10,00,000 × 0.007083 = ₹7,083, so only ₹1,595 reduces the loan. As the balance falls, the interest part shrinks and the principal part grows. That is why a part-prepayment in the early years saves much more interest than the same amount paid near the end. Switch the schedule to “By month” to see every EMI.
Longer tenure: lower EMI, higher total cost
| Tenure | EMI | Total interest |
|---|---|---|
| 10 years | ₹12,399 | ₹4,87,796 |
| 15 years | ₹9,847 | ₹7,72,602 |
| 20 years | ₹8,678 | ₹10,82,846 |
| 25 years | ₹8,052 | ₹14,15,878 |
Stretching the loan from 10 to 20 years cuts the EMI by about ₹3,700 a month but more than doubles the interest you pay.
Home, car, personal and business loans
- Home loans: long tenures (often 15–30 years) and usually floating rates linked to an external benchmark such as the RBI repo rate, so the EMI or the tenure can change when rates move.
- Car and two-wheeler loans: usually 3–7 years, often at a fixed rate.
- Personal loans: shorter (1–5 years) and costlier, because there is no security.
- Business loans for MSMEs, including PM Mudra Yojana loans (Shishu up to ₹50,000, Kishore up to ₹5 lakh, Tarun up to ₹10 lakh and Tarun Plus up to ₹20 lakh): the EMI formula is the same; the rate depends on the bank or NBFC and on your profile.
Interest rates vary by lender, loan type and credit score. Use the rate your lender actually quotes — this calculator shows the maths, it is not a recommendation to borrow.
Common mistakes
- Comparing a flat rate with a reducing rate. A 10% flat rate for 3 years costs about the same as an 18% reducing-balance rate, because flat interest is charged on the full loan for the whole term.
- Looking only at the EMI. Processing fees, insurance and GST on fees add to the real cost.
- Forgetting broken-period interest: if the loan starts mid-month, the first EMI (or a separate pre-EMI charge) can be different.
- Assuming the rate never changes. On a floating-rate loan, check each statement for rate resets.