An EMI (Equated Monthly Instalment) is the fixed amount you pay your lender every month until the loan is repaid. Each EMI has two parts: interest on the amount you still owe, and principal, which reduces what you owe. Understanding how the two interact helps you choose a loan you can comfortably afford.
The EMI formula
Almost all personal, business, home and car loans in India use the reducing-balance method:
EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1)
- P is the loan amount (principal)
- r is the monthly interest rate — the annual rate divided by 12 and by 100
- n is the number of monthly instalments
A worked example
Say you borrow ₹2,00,000 at 12% a year for 24 months.
- Monthly rate r = 12 ÷ 12 ÷ 100 = 0.01
- (1 + r)^n = 1.01^24 ≈ 1.2697
- EMI = 2,00,000 × 0.01 × 1.2697 ÷ (1.2697 − 1) ≈ ₹9,415
Over 24 months you pay about ₹2,25,950 in total, of which roughly ₹25,950 is interest.
Why early EMIs are mostly interest
Interest is charged on the outstanding balance. In month one, you owe the full ₹2,00,000, so ₹2,000 of your first EMI is interest and only about ₹7,415 reduces the principal. Each month the balance falls, so the interest portion shrinks and more of your EMI goes to principal. This is why prepaying early in the loan saves the most interest.
Four ways to lower your EMI or total cost
- Choose a longer tenure — this lowers the EMI, but you pay more interest overall. Pick the shortest tenure whose EMI fits your budget.
- Improve your credit score before applying — a better score can get you a lower rate. Even 1–2 percentage points makes a visible difference.
- Borrow only what you need — a smaller principal lowers both the EMI and the interest.
- Prepay when you can — part-prepayments reduce the principal directly. Check the prepayment charges in your Key Fact Statement first.
What the formula doesn't include
Your EMI covers principal and interest only. Processing fees, GST, insurance premiums and other charges are separate. Compare the Annual Percentage Rate (APR) shown in each lender's Key Fact Statement, which includes these costs, to see the true price of a loan.
A good rule of thumb: keep all your EMIs together below 40–50% of your monthly take-home income.
This article is for general information only and isn't financial advice. Rates, fees and eligibility are set by each lender.