What Is EMI And How Is It Calculated?

By BankBazaar | November 20, 2017

Today, it’s impossible to imagine buying anything without a loan. With an increase in day-to-day expenses and a rise in inflation, loans have become an integral part of our lives. However, getting a loan nowadays has now become much easier and is far from the cumbersome process it used to be in days gone by.

In fact, getting a loan could turn out to be useful, given the right circumstances. For instance, when it comes to buying a house, a Home Loan may be the smartest option, especially when you factor in the tax breaks that bring down the cost of your loan. But, before you approach a bank or financial institution for a loan, it’s important to know the basics of borrowing and lending so that you don’t regret any decisions later.

Additional Reading: 5 Hidden Home Loan Tax Incentives

The most important component of a loan is the EMI. We’re going to tell you all you need to know about EMIs and how they are calculated.

What is an EMI?

An EMI or Equated Monthly Instalment is a fixed amount of money that you need to pay to your bank or financial institution every month as repayment towards the loan you have taken until your loan is fully repaid.

In simple terms, an EMI, in this case, is nothing but a loan feature that lets you borrow money for immediate use while allowing you to pay it back in instalments over an extended period of time. The EMI value depends on the loan amount, interest rate charged and the tenure.

The EMI is paid to the bank on a fixed date every month via cheque or by setting up auto debit instructions with your bank.

Additional Reading: Simple Ways to Reduce Your Loan EMI

What are the different components of EMIs?

EMIs mainly consist of two parts, namely the principal amount and the interest component. The interest is charged on the principal amount, which is then spread across each month of the loan tenure.

In the early years of the loan, a huge portion of the EMI consists of the interest amount that is payable by the borrower. As the loan matures and the principal progressively gets paid, the outstanding loan amount reduces simultaneously. The interest part thus becomes lower than the principal amount.

BB Tip: If you are able to afford the option of prepaying part of your loan, it is better to do during the early months/years of the loan tenure so that your principal decreases, thereby saving you interest on later payments.

Additional Reading: EMI in Advance vs EMI in Arrears

Will the EMI change during the loan tenure?

The EMI amount may change in the following cases:

You opt for a floating interest rate – If you opt for a floating interest rate, the interest rate on your loan will change whenever the new floating rate is reset by the lender. This will result in a change in your EMIs.

However, you can instruct your bank or lender to not to change the EMI and instead request for a change in the tenure of the loan.

You prepay the loan amount – If you prepay the loan amount during the tenure of the loan, your EMI will change accordingly. As the principal of the loan goes down, the interest due will change based on this new principal. Even in this case, you can ask the lender to change your tenure instead of the EMI. This will help you repay the loan amount quickly.

You opt for progressive EMIs – A few lenders offer the option of repaying the loan through progressive EMIs. Here, you initially pay a fixed EMI for a specific time and after the completion of that term, you start paying larger EMIs. This is generally preferred by millennials who have just started their career and cannot afford to pay large EMIs initially, but who hope to pay larger EMIs as they grow in their profession.

Additional Reading: EMI Payments Explained

What are the factors affecting EMI?

The EMI of any loan is dependent on three major factors:

Loan amount: It represents the amount you have borrowed from the bank. That’s the primary factor that decides your monthly instalments. With an increase in the loan amount, the EMI to be paid also increases.

Rate of interest: It is the rate of interest charged by the bank on your loan. This is determined by the bank or financial institution after making several calculations like your income, repayment capacity, credit history etc.

Tenure: It is the time taken by you to repay the entire loan amount including the interest rate. This will also have a major impact on your EMIs. One should understand that an increase in tenure means that you will have to pay more interest to the bank.

What is Amortisation Schedule?  

A loan amortisation schedule is a tabular representation of your loan with the EMI payment. It shows the breakdown of the interest and principal component of the EMI payment. This schedule helps you examine how your loan will progress over time.

It consists of information like period of scheduled payments, the amount borrowed and amount outstanding. In case you want to foreclose or refinance the loan, this schedule will come in handy in such cases.  It also provides details of interest for tax-related benefits.

Amortisation Table Illustration

How to calculate an EMI?

Here’s the mathematical formula to calculate an EMI.

EMI= P x r x (1+r) ^n/ ((1+r) ^n – 1)

Here:

‘P’ is the amount that you want to borrow.

‘r’ is the rate of interest that is applicable on your loan. It is calculated on a monthly basis instead of the annual rate of interest.

‘n’ is the duration of the loan in terms of months.

Let’s take an example to calculate EMI using the above formula assuming the loan is Rs. 10, 00,000 at 9% p.a. for 15 years.

Principal amount = Rs. 10, 00,000

Monthly interest = 0.09/12 = 0.0075

N = 15 years, or 180 months

EMI = (10, 00,000 x 0.0075) x (10.0075) to the power of 180/ [(1 0.0075) to the power of 180]-1

Therefore your EMI = Rs. 10,142.67, which is a combination of both the interest and principal portion of the loan, to be paid each month.

But, it’s quite a task to calculate your monthly instalments using that complex mathematical formula. So, to make things easier for you, we have various online EMI calculators to assist you.

Make use of these free online EMI calculators to know how much you need to pay each month so you can plan your finances accordingly. Don’t forget, at the end of the day, loans are liabilities and it is in your best interest to calculate the EMIs beforehand to make informed financial decisions and stay out of debt forever!

Now that you know all about EMIs, go ahead and explore our amazing loan offers and choose one that suits your needs. Happy borrowing!

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

47 thoughts on “What Is EMI And How Is It Calculated?

  1. AvatarFISH

    Hi Salute,

    You said " The interest component will be the greater portion of the EMI, which will reduce leading up to the loan tenure, while the reverse is true for the principal component."

    How this is calculated? Any formulas or… in what basis they calculating the same.

    If i get the answer for the same, i am really happy.

    Good information

    Thanks

    Reply
  2. Avataradmin

    Hi Fish,

    Thanks for the note. You can log on to our website bankbazaar.com and check out our EMI calculator tool. It is a very useful tool, that will help you understand how this works. Keep checking our guide for more such articles, which will explain the logic involved. Thanks.

    Reply
  3. AvatarFish's Friend

    Hi Fish,

    Here is the formula that you requested.

    EMI = LI * ( [ (1+I) ^ T ] / [ ( 1+I) ^ T – 1] )

    Where

    L – Loan Amount
    I – Interest Rate per Month (12 % of Annual rate is equivalent to 1% of Monthly rate i.e. divide the Annual rate by 12 to get monthly rate)
    T – Tenure in Months

    Reply
  4. Avatarsomnath

    It is a very nice tool. Can you tell me if a Pre-EMI is given for a part disbursement home loan, how does it works? Is the entire Pre-EMI amount cosiderable for final EMI calculation or what?

    Reply
  5. Avatarshantha

    what is emi is unknown to many. it's easy monthly instalments. there are more than 21 nationalised banks. some are agricultural banks .thers are industrial. For a nation to co-exist boththe sector banks are essential. government goes through the accounts of these banks decide on the priority of which bank s assume the the importance of the first nationalised, secondetc. banks cater to the finance of people% regularly check whether the finance is invested in the proper manner and certify.the growth of finance makes a prosperous nation and the economics of a nation is of utmost importance for the progress of humanity. the earlier19th century is over. we are moving on to the next century the 20th.there must be a change through every sector. the smooth going of the century much depends on the changing attitude and a civilised society.

    Reply
  6. AvatarMaya

    if the loan amt is 20 lacs for 20years what will be the EMI? can pls tell me

    Reply
  7. AvatarBijy

    if the loan amt is 20 lacs for 20years what will be the EMI? can pls tell me

    Reply
  8. Avatarmurugan

    hello sir i am worked in jkk software i want personal loan amount rs 50000 plz to send mail and emi

    Reply
  9. Avatarvijay raj singh

    hello sir i am astudent . and i want to 2 lakh ruppes loan for education. so plz send me mail

    Reply
  10. Avatarmeenakshi

    I would like to know for one year EMI, when we make down payment to close the loan account- for example 6 months in advance, does the bank include the interest of 12 months. Kindly reply

    Reply
  11. Avatarvali

    please can u provide the formula for emi calculation if u do so i will be vey happy

    Reply
  12. AvatarAbhi

    Hi,
    I hv taken a loan of rs. 1 lac, loan tenure of 36 months, also am paying an installment of rs. 4595/month, please provide me the actual rate of interest, since it is a privatised bank am not clear abt the interest, and also if i close the loan within 2 years is that works for me and how much do i pay extra if i pre close. kindly revert.

    Reply
  13. Avatartoma rudra

    i would like to apply a loan amount of Rs 50,000, what will be my monthly EMI and for how many maximum years it can be run?

    Reply
  14. AvatarANINDYA CHAKRABORTY

    i would like to apply a loan amount of Rs 2,50,000, what will be my monthly EMI and for how many maximum years it can be run?

    Reply
  15. AvatarArun

    what is the formula to calculate the principal part and interest part in a loan?

    Reply
  16. Avatarshoukat ali

    if the loan amt is 1 lacs for 2years what will be the EMI? can pls tell me

    Reply
  17. AvatarElango

    Its great work….. thank u for the work u have done… but EMI calculation is based on the monthly compounding loans. If the loan is quartely or half yearly compounding interest, then this EMI will reduce… Am i correct? Plz explain me….

    Reply
    1. AvatarTeam BankBazaar

      Hi Elango,
      Thanks for your valuable feedback. It is true that the interest will reduce if quarterly compounding is considered. It will be even lower for half yearly compounding.

      Cheers,
      Team BankBazaar

      Reply
  18. AvatarYasuaki Chan

    hello,
    can u tell me how is the EMI calculated if p= 10,00,000 ; r= 10% ; and t = 3 yrs or 36 months?

    Reply
  19. AvatarChau Alingsa Pangyok

    16000 what will be emi of 2 month plzzz

    Plzz answer mee frnds

    Reply
    1. AvatarTeam BankBazaar

      Hi Chau, The EMI will depend on the loan tenure and interest rate. We will not be able to help you without these details.

      Reply
    1. AvatarTeam BankBazaar

      Hi Raj, Help us out here. Tell us what you found ridiculous. Cheers, Team BankBazaar

      Reply
    1. AvatarTeam BankBazaar

      Hi Sujeet, You cannot avail of an EMI option on your Debit Card. Cheers, Team BankBazaar

      Reply
  20. Avatarjitendrakulkarni

    This is really a great information. I want to bring one more point here that EMI loan calculator also works on this basic mathematical formula. Here if you simply input your principal amount, interest rate and the time period, then you’ll get the EMI. Source:emicalculators.in

    Reply
  21. Avatarakhil

    If I buy a new android phone so what will be the EMI & the processor for bank loan???.

    Reply
    1. AvatarTeam BankBazaar

      Hi Akhil,

      You don’t have to apply for a bank loan specifically while buying a new gadget, if you have a Credit Card you can convert the purchase into easy installments and pay them over a period of few month’s. Some banks also provide no interest EMIs on these purchases while swiping your Credit Card. You can compare Credit Cards here.

      Cheers,
      Team BankBazaar

      Reply
  22. AvatarArav Ramakan

    Hi Shipra,

    Excellent blog!!

    Always wandered how this bank people calculate EMI on the basis of months. and how much extra amount has to be paid.
    your blog representing the info it did and the formula for EMi calculation is quite clear.

    Reply
    1. AvatarTeam BankBazaar

      Hi Arav, We’re glad we could be of help. Keep reading our blog for more insights into the world of finance. Cheers, Team BankBazaar.

      Reply
  23. AvatarRajanChauhan

    Very Informative Article !!!

    I strongly believe Everyone future loan borrower should online calculate EMI & Amortisation chart to avoid any surprise later.

    Reply
    1. AvatarTeam BankBazaar

      Hi Rajan, We absolutely agree with you. Keep reading our blog for more insights into the world of finance. Cheers, Team BankBazaar.

      Reply
    1. AvatarTeam BankBazaar

      Hi there,

      You can try using this EMI Calculator. You just need to fill out the details to calculate your EMI. Feel free to get in touch with us if you have any questions.

      Cheers,
      Team BankBazaar

      Reply
    1. Team BankBazaarTeam BankBazaar

      Hi there!

      Thanks for stopping by. We’re extremely delighted to know that you liked our article. Please keep reading our blogs for more such insights into the world of personal finance.

      Cheers,
      Team BankBazaar

      Reply
    1. Team BankBazaarTeam BankBazaar

      Hi TA,

      Thanks for writing in. You can compute your EMIs by using the EMI calculator contained in this post. This should give you an estimate of your loan EMIs.

      Cheers,
      Team BankBazaar

      Reply

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