How to calculate EMI by hand (and check the bank's number)
Learn the EMI formula, work through a full example step by step, and see why a longer tenure quietly costs you far more interest.
What an EMI actually is
An equated monthly instalment is a fixed payment that clears both interest and principal over an agreed number of months. The payment stays the same every month, but what it buys changes: early instalments are mostly interest, later ones mostly principal.
That is why paying off a loan in its second year barely dents the outstanding balance, and why prepaying early saves far more than prepaying late.
The formula, one piece at a time
EMI = P x r x (1 + r)^n / ((1 + r)^n - 1). P is the amount borrowed. r is the monthly interest rate, which is the annual rate divided by twelve and then by a hundred. n is the number of monthly instalments.
The most common mistake is putting the annual rate straight into r. An 8.4% annual rate is 0.007 as a monthly decimal, not 8.4 or 0.084.
A full worked example
Take a loan of 20,00,000 at 9% a year for 15 years. The monthly rate r is 0.09 divided by 12, which is 0.0075. The number of instalments n is 15 times 12, which is 180.
(1 + r)^n works out to about 3.838. Putting that into the formula gives an EMI of roughly 20,285 a month. Over 180 months you pay about 36,51,000 in total, meaning 16,51,000 in interest on a 20,00,000 loan.
The tenure trap
Stretching the same loan to 25 years drops the instalment to about 16,785, which feels like a win. But the total interest climbs to roughly 30,35,000, nearly double.
Before accepting a longer tenure, run both versions and compare the total payable rather than the monthly figure. Choose the shortest tenure whose instalment you can comfortably afford in a bad month, not a good one.
What the formula does not include
Processing fees, documentation charges, insurance bundled with the loan and prepayment penalties all sit outside the EMI. Two loans with identical EMIs can differ by tens of thousands once fees are counted.
- Ask for the total cost of credit in writing, not just the rate.
- Check whether the rate is fixed or floating, and how often a floating rate resets.
- Confirm the prepayment terms before you sign, not after.
Tools mentioned in this guide
Frequently asked questions
Why does my bank's EMI differ slightly from mine?
Rounding and the exact day count convention account for most small differences. A gap of more than a few rupees usually means a fee has been added to the principal.
Does prepaying reduce the EMI or the tenure?
Most lenders let you choose. Reducing the tenure saves more interest; reducing the EMI improves monthly cash flow.
Is a floating rate cheaper than a fixed rate?
Historically floating rates have often been cheaper, but they move with the market. Fixed rates cost more for the certainty they buy.
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