Guide · Loan
How EMI is calculated
banks use the reducing-balance EMI formula. Here is the maths, a worked example, and the mistakes that throw people off.
Almost every retail loan EMI is built on one standard formula. Once you see it once with real numbers, the calculator stops feeling like a black box. Whether you are comparing offers from large banks or a local lender, the reducing-balance EMI formula is the same.
The formula
EMI = P × r × (1+r)n / ((1+r)n − 1)
P is the loan principal. r is the monthly interest rate (annual rate ÷ 12 ÷ 100). n is the number of months in the tenure. If a bank quotes 10.5% a year, r = 10.5 / 12 / 100 = 0.00875.
This is a reducing-balance method: interest each month is charged only on what is still outstanding. Flat-rate marketing — where interest is computed on the full principal for the entire period — is a different beast and usually looks cheaper until you compare total interest. Stick to reducing balance when you compare home and personal loans. See EMI vs reducing balance for why flat-rate quotes mislead.
Worked example — car loan
Take a car loan of 8,00,000 at 9.6% a year for 5 years (60 months).
Monthly rate r = 9.6 / 12 / 100 = 0.008. Then (1+r)n = 1.00860 ≈ 1.6122.
EMI ≈ 8,00,000 × 0.008 × 1.6122 / (1.6122 − 1) ≈ 16,847.
Total payout ≈ 16,847 × 60 ≈ 10,10,820. Interest cost ≈ 2,10,820. Your amortisation table will show month 1 interest near 6,400 and principal repayment near 10,447 — the split flips over time.
Run the same inputs on the EMI calculator and the car loan calculator to confirm. Tiny rounding differences of a currency unit or two are normal across banks.
Worked example — home loan
Now a larger ticket: 50,00,000 at 8.5% for 20 years (240 months).
r = 8.5 / 12 / 100 = 0.007083. (1+r)240 is a large number — that is why calculators exist. EMI comes to roughly 43,400. Total payment ≈ 1.04 crore. Interest alone ≈ 54 lakh — more than the principal you borrowed.
Shorten tenure to 15 years (180 months) and EMI rises to about 49,200, but total interest drops to roughly 38.5 lakh. That 5,800 monthly difference saves you 15+ lakh over the loan life. Tenure is a lever — pull it with eyes open. Our tenure guide walks through that trade-off.
Step-by-step without a spreadsheet
1. Convert the annual rate to a monthly decimal. 2. Convert years to months if the offer is written in years. 3. Plug P, r, and n into the formula (or use the calculator). 4. Multiply EMI by n for total payment. 5. Subtract P for total interest.
If you only care about "can I afford the monthly debit?", stop at step 3. If you are choosing between 15 and 20 years on a home loan, steps 4 and 5 are where the real cost hides. Write both total interest figures on paper before you pick the longer tenure just because the EMI looks softer.
Building a month-by-month amortisation table
Month 1: Interest = Outstanding × r. Principal repaid = EMI − Interest. New outstanding = Old outstanding − Principal repaid.
Month 2: Repeat with the new outstanding. Each month the interest portion shrinks and the principal portion grows, while EMI stays fixed on a fixed-rate loan.
You do not need to build this by hand for 240 months. Banks provide the schedule at disbursal. But understanding the first three rows explains why prepaying in year 2 saves far more interest than prepaying in year 18.
Why your bank's EMI might differ slightly
Some lenders round EMI up to the next currency unit. Others adjust the final instalment so the balance hits exactly zero. Part-prepayments mid-tenure rewrite the schedule from that month onward. Floating-rate resets change r from a certain month onward. None of that breaks the formula — it just means the published schedule is the source of truth after disbursal.
Processing fees deducted from disbursal also matter. If you need 10 lakh in hand and the fee is 1%, you may need to sanction a little more than 10 lakh so the net credit matches your need. EMI is then calculated on the sanctioned principal, not the net credit in your account.
Insurance premiums bundled into the loan increase P. A 50 lakh home loan with 2 lakh insurance add-on calculates EMI on 52 lakh. Check whether the bank included such items in the EMI quote they gave you.
Quick checks before you trust a number
Tenure entered in years instead of months is the classic error — typing 20 as months instead of 240 months produces a nonsense EMI that looks too good. Mixing flat and reducing rates is the second trap. Comparing a floating offer to a fixed one without noting reset rules is third.
If the salesperson quotes "6% flat" on a consumer durable loan, run the total interest and compare with a reducing-balance quote at the same EMI level. The flat loan often costs more.
Product-specific tools: home loan calculator, car loan calculator, personal loan calculator. Hub page: EMI calculator guide.
Car loan vs home loan — same formula, different scale
A 8 lakh car loan and a 80 lakh home loan use identical maths. The difference is tenure and rate. Car loans run 3–7 years at 9%–12%. Home loans run 10–30 years at 7.5%–9.5%. The home loan's total interest often exceeds the principal because of the long tenure — a 50 lakh loan at 8.5% for 25 years costs roughly 67 lakh in interest alone. The car loan's shorter life keeps total interest manageable even at a similar rate.
When a dealer quotes "zero percent EMI", check whether a processing fee or subvention charge is loaded into the on-road price. The EMI formula still applies — the rate may just be hidden in the price, not shown as interest.
Using Excel or Google Sheets
Excel's PMT function: =PMT(rate/12, n, -P) where rate is annual percent and n is months. Google Sheets uses the same syntax. If you prefer not to type formulae, the EMI calculator is faster for one-off checks. Spreadsheets win when you want to model 10 tenure scenarios side by side.
Disclaimer: Illustrative maths only. Not a loan offer. Verify with your lender's amortisation schedule before you sign.