EMI stands for Equated Monthly Instalment. It is the regular payment made towards a loan and generally includes both principal and interest. The amount depends mainly on the loan principal, interest rate and repayment tenure.
The standard EMI formula
For a standard reducing-balance loan, the formula is:
EMI = P × r × (1 + r)n ÷ [(1 + r)n − 1]
- P is the amount borrowed.
- r is the monthly interest rate expressed as a decimal. For a quoted annual rate, divide by 12 and then by 100.
- n is the total number of monthly instalments.
An illustrative example
Suppose someone borrows ₹5,00,000 at a nominal annual interest rate of 12% for 3 years. The monthly rate used in this example is 1% and the tenure is 36 monthly payments. A standard EMI calculator can estimate the monthly instalment and total interest based on those inputs.
This example is for illustration only. Actual repayments may differ due to the lender’s calculation method, fees, insurance, rate changes, payment dates or loan structure.
How tenure changes the cost
A longer tenure usually reduces the monthly EMI but spreads repayment over more months, which can increase total interest. A shorter tenure generally increases the monthly payment while reducing the time over which interest accrues. Choose a payment that remains manageable, including during unexpected expenses.
Common mistakes to avoid
- Comparing EMIs without comparing the interest rate and total repayment.
- Forgetting processing fees, insurance or other charges.
- Assuming an advertised rate is guaranteed for every applicant.
- Choosing a tenure that makes the monthly budget too tight.
- Not checking whether the rate is fixed or floating.
Before taking a loan, ask the lender for a repayment schedule and written details of all charges. An EMI estimate is a planning aid, not a loan offer or approval.
Editorial note: This article is for general information only. Verify current rates, fees and eligibility with the relevant institution before making a financial decision.