How Loan EMI Is Calculated: The Formula, a Worked Example, and How to Reduce It

An EMI (equated monthly installment) is the fixed amount you pay every month to repay a loan. Each payment covers the interest for the month plus part of the principal. Early on, most of the payment is interest; later, most of it is principal.

The formula

EMI = P x r x (1 + r)^n / ((1 + r)^n - 1)

P = loan amount (principal)
r = monthly interest rate = annual rate / 12 / 100
n = number of monthly installments

A worked example

Borrow 1,000,000 at 9% per year for 5 years. Here r = 9 / 12 / 100 = 0.0075 and n = 60. Plugging these into the formula gives an EMI of about 20,758.36 per month.

• Total paid: 20,758.36 x 60 = about 1,245,501.
• Total interest: about 245,501 on a 1,000,000 loan.
• The same loan over 10 years gives an EMI of about 12,668 but total interest of about 520,109.

What changes the EMI

• Loan amount: the EMI scales in proportion to the principal.
• Interest rate: even a one-point difference adds up over the years.
• Tenure: longer means a lower EMI but much more total interest, as the 5-year versus 10-year example shows.

Ways to reduce the interest you pay

1. 1Make a larger down payment so you borrow less.
2. 2Choose the shortest tenure whose EMI you can comfortably afford.
3. 3Make part-prepayments; they reduce the outstanding principal, cutting interest, and you can choose to shorten the tenure or lower the EMI.
4. 4Compare rates and fees across lenders, and check whether floating rates can be reset.
5. 5Check for prepayment charges before committing.