An EMI is a fixed monthly payment. Early payments are mostly interest, later ones mostly principal.
The formula
EMI = P x r x (1 + r)^n / ((1 + r)^n - 1)
- P is the loan amount.
- r is the monthly interest rate: the annual rate divided by 12, as a decimal.
- n is the number of monthly payments.
Worked example
Borrow 100,000 at 12% a year for 12 months.
- r = 12% / 12 = 0.01
- (1.01)^12 = 1.126825
- EMI = 100,000 x 0.01 x 1.126825 / 0.126825 = about 8,884.88
- Total paid = 8,884.88 x 12 = about 106,618.60
- Interest paid = about 6,618.60
Flat versus reducing balance
A flat 12% a year on 100,000 would add 12,000 over a year, giving a total of 112,000, even though you repay a part of the loan every month. The same 12% on a reducing balance costs only about 6,619. Always ask which one an offer uses, and compare the total amount repayable.
Before you borrow
- Compare the total cost, not just the monthly figure.
- Add fees such as processing, late and early-repayment charges.
- Only borrow what your budget can repay. Late payments add penalties.
- Use licensed lenders and avoid anyone asking for an upfront fee to approve a loan.
A loan calculator app can show different scenarios, but it is only a guide. Your lender’s written terms are what count. See how to check benefit and loan information.