Key takeaways
- EMI = P × r × (1+r)^n ÷ ((1+r)^n − 1), where r is the monthly rate and n the number of months.
- A longer tenure lowers the EMI but raises the total interest sharply.
- Prepayments early in the loan save the most interest.
An EMI looks like one simple number, but it hides how much of your money goes to interest. Understanding the formula helps you choose a tenure and decide when to prepay.
The formula
EMI = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1)
- P – the loan amount (principal)
- r – the monthly interest rate: annual rate ÷ 12 ÷ 100
- n – the number of monthly instalments
Example: ₹10,00,000 at 9.5% for 5 years. r = 9.5 ÷ 12 ÷ 100 = 0.0079167, n = 60. EMI ≈ ₹21,002. Total paid ≈ ₹12,60,100, so interest ≈ ₹2,60,100.
Check it in the EMI calculator, which also shows the year-by-year schedule.
Why early EMIs are mostly interest
Interest is charged on the balance still owed. In month one the balance is the full loan, so interest is at its highest and only a small part of the EMI reduces the principal. As the balance falls, the interest part shrinks and the principal part grows. This is called amortisation.
On a 20-year home loan, the first few years of EMIs can be more than half interest.
Tenure vs total cost
Same ₹30,00,000 home loan at 8.5%:
| Tenure | EMI (approx.) | Total interest (approx.) |
|---|---|---|
| 10 years | ₹37,196 | ₹14.6 lakh |
| 15 years | ₹29,542 | ₹23.2 lakh |
| 20 years | ₹26,035 | ₹32.5 lakh |
| 30 years | ₹23,067 | ₹53.0 lakh |
Going from 20 to 30 years saves about ₹3,000 a month but costs over ₹20 lakh more in interest.
When prepaying helps most
Because interest is front-loaded, a prepayment in the early years removes principal that would otherwise have attracted interest for many years. Two ways to use a prepayment:
- Keep the EMI, cut the tenure: saves the most interest.
- Keep the tenure, cut the EMI: eases monthly cash flow.
Check your loan’s prepayment terms. Floating-rate home loans taken by individuals generally carry no prepayment penalty under RBI rules, while fixed-rate and some personal loans may charge one.
Reducing balance vs flat rate
Banks quote reducing-balance rates, which this formula uses. Some lenders quote flat rates, charging interest on the original amount for the whole tenure. A 12% flat rate costs about as much as 20–22% on a reducing balance over two to five years. Always ask which one is quoted.
Before you sign
- Compare the annual percentage rate (APR), including processing fees and insurance.
- Keep the EMI within a comfortable share of take-home pay.
- Run two or three tenures in the EMI calculator and look at the total interest, not just the EMI.
For information only, not financial advice.
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