How EMI Is Calculated: Formula, Example and Ways to Reduce Interest
The EMI formula explained with a worked example, and how tenure and rate change what you really pay.
An EMI (equated monthly instalment) is the fixed amount you pay every month to repay a loan. Each EMI contains part principal and part interest. Understanding the formula helps you compare loans and plan your budget.
The EMI formula
EMI = P × r × (1 + r)n ÷ ((1 + r)n − 1)
- P is the loan amount (principal).
- r is the monthly interest rate, which is the annual rate divided by 12 and by 100.
- n is the number of monthly instalments.
Worked example
Take a loan of ₹10,00,000 at 9% a year for 10 years. Here r is 0.0075 and n is 120. The EMI works out to about ₹12,668. Over 120 months you pay about ₹15.2 lakh in total, of which about ₹5.2 lakh is interest.
How tenure and rate change the cost
| Loan of ₹10 lakh | Monthly EMI (approx.) | Total interest (approx.) |
|---|---|---|
| 9% for 5 years | ₹20,758 | ₹2.46 lakh |
| 9% for 10 years | ₹12,668 | ₹5.20 lakh |
| 9% for 15 years | ₹10,143 | ₹8.26 lakh |
| 10% for 10 years | ₹13,215 | ₹5.86 lakh |
A longer tenure lowers the EMI but sharply raises the total interest. A one percentage point rise in rate adds roughly ₹66,000 of interest on this loan.
How the split between interest and principal works
On a reducing balance loan, interest each month is charged on the outstanding principal. In the early years most of your EMI goes towards interest. As the balance falls, more of each EMI repays principal.
Ways to reduce the interest you pay
- Choose the shortest tenure you can comfortably afford.
- Make part-prepayments, which reduce the outstanding principal. Check your lender’s prepayment terms for charges.
- Compare effective rates, not just headline rates, and include processing fees.
- Improve your credit profile before applying, since it influences the rate offered.
- Opt for a balance transfer only after counting the fees against the savings.
Plan before you borrow
Try our loan projection tool and other free finance calculators. If you are borrowing for a business, also read how banks assess repayment capacity in our guide to project reports and DSCR.
Frequently asked questions
What is the EMI on a ₹10 lakh loan at 9% for 10 years?
About ₹12,668 a month.
Does a longer tenure reduce my EMI?
Yes, but it increases the total interest you pay over the life of the loan.
Why is most of my early EMI interest?
Because interest is charged on the outstanding balance, which is highest at the start.
Does prepayment reduce my EMI or my tenure?
That depends on the lender. Many let you choose between a lower EMI and a shorter tenure.
This article is for general information only and is not investment, tax or legal advice. Figures are illustrative, so confirm current rules and rates before making decisions.
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