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How loan EMI is calculated: formula and interest impact

By TabBenchHow we check our guides

An Equated Monthly Installment (EMI) is the fixed monthly amount a borrower pays to a lender on a specified calendar date. Every EMI installment covers both the monthly interest accrued on the remaining balance and a partial repayment of the original loan principal.

In the early years of any long-term loan (like a 20-year home loan), interest constitutes 70% to 80% of each EMI payment. Over time, as the outstanding principal declines, the interest share shrinks and the principal repayment share expands according to standard amortization tables.

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Step by step

  1. Determine the monthly interest rate

    Bank interest rates are quoted annually. Convert the annual rate to a monthly decimal by dividing by 12 and then by 100: r = Annual Rate / (12 × 100). For an 8.4% loan, r = 8.4 / 1200 = 0.007.

  2. Calculate total payment tenure in months

    Multiply the loan tenure in years by 12: n = Years × 12. A 20-year loan has n = 240 monthly payments.

  3. Apply the reducing-balance amortization formula

    The standard formula is: EMI = [P × r × (1 + r)^n] / [(1 + r)^n - 1], where P is principal, r is monthly rate, and n is total months.

  4. Calculate total repayment and interest expense

    Total Repayment = EMI × n. Total Interest Paid = Total Repayment - Principal. For a $100,000 loan at 8.4% for 20 years, EMI is $861.50, and total interest paid over 20 years equals $106,760.

Things worth knowing

  • Prepaying even one extra EMI every calendar year can cut a 20-year loan tenure by 3 to 4 years.
  • Fixed-rate loans keep the same EMI throughout, whereas floating-rate loans adjust either the tenure or the EMI when central bank benchmark rates move.
  • Processing fees, statutory stamp duty, and mortgage insurance are one-off upfront costs and not included in basic EMI math.
  • Check with your lender whether partial prepayments reduce the monthly EMI or shorten the remaining loan duration.

Frequently asked questions

Why is the interest portion so high in the first few years?

Interest is calculated each month on the remaining unpaid loan balance. In year one, the balance is at its highest, meaning monthly interest charges are maximized. As principal is gradually cleared, monthly interest drops.

How much can I save by making regular prepayments?

On a 20-year loan, prepaying 5% of the outstanding balance annually or making one extra monthly payment each year routinely saves between 20% and 35% of the total cumulative interest.

What happens to my EMI if interest rates increase on a floating loan?

Lenders usually keep the monthly EMI payment constant and extend the total number of remaining months (tenure). If the rate increase is steep, the EMI itself may also increase to prevent negative amortization.

Can I use this formula for car and personal loans?

Yes, provided the loan uses reducing-balance interest. Be wary of flat-rate personal loans, where interest is charged on the entire original amount regardless of principal repaid, making the effective rate roughly double the advertised number.

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