What an EMI is made of
An EMI (equated monthly instalment) is a fixed payment you make every month until a loan is repaid. Each payment has two parts: interest on the balance still owed, and a repayment of principal. In the early years most of the EMI is interest, and the share going to principal grows over time.
That is why the loan balance falls slowly at first, and why the total interest on a long loan is so large.
The EMI formula
EMI = P × i × (1 + i)^n ÷ ((1 + i)^n − 1)
P is the loan amount, i is the monthly interest rate (the yearly rate divided by 12), and n is the number of monthly instalments.
Worked example: a ₹10 lakh loan at 9% for 20 years
Here P = 10,00,000, i = 9% ÷ 12 = 0.75% and n = 240. The EMI works out to about ₹8,997 a month.
Over 240 months you pay about ₹21.6 lakh in total, so roughly ₹11.6 lakh of it is interest. You pay back more in interest than the amount you borrowed. Try your own amount, rate and tenure in the EMI Calculator.
How a small prepayment changes the loan
Suppose you pay an extra ₹2,000 a month on the same loan, so ₹10,997 in total. The loan is cleared in about 12 years and 10 months instead of 20 years, and the total you pay falls to about ₹16.9 lakh. That saves roughly ₹4.7 lakh in interest.
Prepayment works because every extra rupee reduces the balance on which interest is charged. The earlier in the loan you do it, the bigger the effect. Check whether your lender charges a prepayment fee, since rules differ by loan type and lender.
Choosing between a lower EMI and a lower total cost
A longer tenure lowers the EMI but raises total interest. A shorter tenure does the opposite. Pick the shortest tenure whose EMI you can pay comfortably, and keep an emergency fund so one bad month does not force you to miss a payment.
If your loan has a floating rate, your EMI or tenure can change when the rate changes, so test a higher rate in the calculator too.
Frequently asked questions
Does the EMI change during the loan?
On a fixed-rate loan it stays the same. On a floating-rate loan, the lender may change the EMI or the tenure when the rate changes.
Are processing fees included in the EMI?
No. Fees and insurance are separate, so add them when you compare offers.
Is it better to prepay a loan or invest the money?
It depends on the loan's interest rate against the return you can expect after tax and risk. Prepaying gives a certain, risk-free saving equal to the loan rate.