EMI Wizard

The Formula

EMI = P × r × (1 + r)ⁿ / ((1 + r)ⁿ - 1)

P Principal, the amount you borrow

r Monthly interest rate = annual rate / 12 / 100

n Tenure in months

EMI Equated Monthly Instalment, fixed amount paid each month

Worked Example

Loan of Rs 5,00,000 at 8.5% per year for 60 months (5 years).

Convert annual rate to monthly

r = 8.5 / 12 / 100 = 0.007083

Banks quote annual rates but charge monthly. Divide by 12 to get the rate applied each month.

Calculate the compound factor

(1 + r)ⁿ = (1.007083)⁶⁰ = 1.5269

This is how much Rs 1 grows over 60 months at this rate. It captures the compounding effect.

Apply the EMI formula

EMI = 5,00,000 × 0.007083 × 1.5269 / (1.5269 - 1)

EMI = 5,00,000 × 0.010222 / 0.5269

EMI = Rs 10,226

You pay Rs 10,226 every month for 60 months regardless of how much principal is left.

Month 1 breakdown

Interest = 5,00,000 × 0.007083 = Rs 3,542

Principal = 10,226 - 3,542 = Rs 6,684

Closing balance = 5,00,000 - 6,684 = Rs 4,93,316

In month 1, Rs 3,542 goes to the bank as interest. Only Rs 6,684 reduces your actual debt.

Month 60 breakdown

Interest = 10,154 × 0.007083 = Rs 72

Principal = 10,154 (clears remaining balance)

By the last month almost nothing goes to interest. This is the reducing balance in action.

The true cost

Total paid = 10,226 × 60 = Rs 6,13,560

Total interest = 6,13,560 - 5,00,000 = Rs 1,13,560

Cost factor = 6,13,560 / 5,00,000 = 1.23x

For every Rs 1 borrowed, you pay back Rs 1.23. The extra 23 paise is the bank's profit on your loan.

Why Reducing Balance Matters

Reducing Balance

Interest is charged on the outstanding balance each month. As you repay principal, interest shrinks. This is how all standard loans work.

Flat Rate (watch out)

Some lenders quote a flat rate where interest is charged on the original principal throughout. A 10% flat rate is equivalent to roughly 18-19% reducing balance. Always ask which method a lender uses.

Prepayment Benefit

Paying extra principal early in the loan has a massive impact because you skip the high-interest early months. Even one extra EMI per year can cut years off a home loan.

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