EMI (Equated Monthly Installment) is the fixed amount you pay every month towards a loan. Understanding how EMI is calculated helps you plan your finances better.
EMI Formula
EMI = P × r × (1+r)^n / ((1+r)^n - 1)
Where:
- P = Principal loan amount
- r = Monthly interest rate (annual rate / 12 / 100)
- n = Loan tenure in months
Example
Say you take a ₹5,00,000 loan at 12% annual interest for 5 years (60 months).
- P = 5,00,000
- r = 12 / 12 / 100 = 0.01
- n = 60
EMI = 5,00,000 × 0.01 × (1.01)^60 / ((1.01)^60 - 1)
EMI = 5,00,000 × 0.01 × 1.8167 / 0.8167 = ₹11,122
You pay ₹11,122 per month for 60 months. Total payment = ₹6,67,320. Total interest = ₹1,67,320.
Key Insights
- Higher interest rate → higher EMI
- Longer tenure → lower EMI but more total interest
- Shorter tenure → higher EMI but less total interest
- Prepayments reduce total interest significantly
EMI Calculator
Instead of calculating manually, use an online EMI calculator. Just enter the loan amount, interest rate, and tenure to get your monthly EMI instantly.
Disclaimer: This article is for educational purposes only.
