What is an EMI?
An EMI, or Equated Monthly Instalment, is the fixed amount you pay your lender every month until a loan is fully repaid. Each EMI covers part of the principal and the interest due for that month.
In the early months most of the EMI goes towards interest. As the outstanding balance falls, the interest part shrinks and more of each EMI goes towards repaying the principal.
What is an EMI Calculator?
An EMI calculator works out your monthly instalment, the total interest and the total amount you will repay, based on the loan amount, the rate of interest and the loan tenure.
Why you should use an EMI Calculator?
- Plan your budget: Know your monthly outgo before you borrow, so the EMI fits comfortably within your income.
- See the true cost: See how much interest you will pay over the life of the loan, not just the monthly figure.
- Compare options: Change the amount, rate and tenure to see how each one affects your EMI and total interest.
How Does an EMI Calculator Work?
The EMI calculator works on the following inputs:
- Loan Amount: The amount you borrow.
- Rate of Interest: The yearly rate charged by the lender.
- Loan Tenure: The number of years over which you repay the loan.
The calculator relies on the following formula:
EMI = P × R × (1 + R)^N ÷ ((1 + R)^N − 1)
- P
- Loan Amount (principal)
- R
- Monthly rate of interest (yearly rate ÷ 12 ÷ 100)
- N
- Loan tenure in months
The total amount is the EMI multiplied by the number of months, and the total interest is the total amount minus the loan amount. Lenders may round the EMI and adjust the last instalment, so their figures can differ by a few rupees.
- Interest frequency: Monthly: Interest is charged every month on the balance still owed, so each EMI reduces the interest straight away. Most loans work this way.
- Interest frequency: Yearly: Interest is charged on the balance at the start of each year (annual rest), so your repayments only reduce the interest once a year. This costs a little more.
Formula to Calculate EMI with an Example
Consider an example for a better understanding.
- Loan Amount: ₹5,00,000
- Rate of Interest: 11% per annum
- Loan Tenure: 3 years (36 months)
Using the formula:
EMI = 5,00,000 × 0.00917 × (1.00917)^36 ÷ ((1.00917)^36 − 1)
After calculation, the EMI is ₹16,369. Over 36 months you repay about ₹5,89,297, of which about ₹89,297 is interest.
What affects your EMI?
- Loan amount: A larger loan means a larger EMI and more interest overall.
- Rate of interest: Even a small change in the rate makes a noticeable difference on a large or long loan.
- Tenure: A longer tenure lowers the EMI but increases the total interest you pay.