Loans & EMIs · Updated October 2026 · 6 min read
An EMI (equated monthly instalment) is the fixed amount you pay every month until a loan is repaid. Each EMI covers two things: interest on what you still owe, and a part of the loan amount itself. Knowing how it is worked out helps you compare loans properly and see the true cost before you sign.
In short: Your EMI depends on three things: the loan amount, the interest rate and the tenure. A longer tenure lowers the EMI but raises the total interest you pay. Always compare the total cost, not just the monthly figure.
The EMI formula
Banks and NBFCs use the same standard formula for reducing balance loans:
EMI = P × r × (1 + r)n ÷ ((1 + r)n − 1)
- P is the loan amount (principal).
- r is the monthly interest rate. Divide the yearly rate by 12 and then by 100. For 12% a year, r = 0.01.
- n is the number of monthly instalments. A 3-year loan has n = 36.
Worked example 1: a personal loan
Say you borrow ₹5,00,000 at 12% a year for 3 years.
- Monthly rate r = 12 ÷ 12 ÷ 100 = 0.01
- Number of EMIs n = 36
- EMI ≈ ₹16,607
- Total you repay ≈ ₹5,97,858, so the interest cost is about ₹97,858
Worked example 2: a home loan
Now take a ₹30 lakh home loan at 8.5% a year for 20 years (240 EMIs).
- EMI ≈ ₹26,035
- Total you repay ≈ ₹62.48 lakh, so the interest cost is about ₹32.48 lakh
Over a long tenure, the interest can be more than the amount you borrowed. That is why even a small rate difference, or an early prepayment, matters so much on a home loan.
Why your early EMIs are mostly interest
Interest is charged on the balance you still owe. At the start the balance is highest, so most of each EMI goes to interest and only a small part reduces the loan. As the balance falls, the interest part shrinks and the principal part grows, even though the EMI stays the same. The table that shows this month by month is called an amortisation schedule. Ask your lender for it.
How tenure changes your EMI and total cost
- Longer tenure: lower EMI, but much more total interest.
- Shorter tenure: higher EMI, but you pay far less interest overall.
A good approach is to pick the shortest tenure whose EMI you can pay comfortably every month, even in a tight month.
Costs the EMI does not show
- Processing fee: often a percentage of the loan, usually deducted upfront, so you receive less than you borrow.
- GST on fees and charges.
- Insurance bundled with the loan. Check whether it is optional.
- Late payment and bounce charges.
Ask for the Key Facts Statement (KFS), which lenders must give you. It shows the annual percentage rate (APR), which includes these charges and is the fairest number to compare across lenders.
Common questions
Does a lower EMI mean a cheaper loan?
Not always. A lower EMI often comes from a longer tenure, which increases the total interest. Compare the total amount payable or the APR.
What happens to my EMI if the interest rate changes?
On a floating rate loan, lenders usually change the tenure first and keep the EMI the same. You can ask them to change the EMI instead, or choose a mix.
Can I calculate EMI without the formula?
Yes. Use our EMI calculator and enter the loan amount, rate and tenure.
Next steps: Read flat vs reducing balance interest rate, or compare personal and business loans.
Disclaimer: This guide is for education and is not financial advice. Rates, fees and rules change, so check the latest terms with the lender before you borrow.