What is EMI? Full Form, Calculation & How It Works for Loans

EMI stands for Equated Monthly Instalment. It’s the fixed amount you pay every month towards a loan. It includes both interest and the actual loan amount spread over time.

‘Calculation mistake ho gayi? Koi nahi bachpan ke paap hai ’

‘Aur iss paap ke bhagyadari bane humare Tushar ji.’  He took a ₹3,00,00 personal loan at 13% interest for 3 years. He assumed his EMI would be ₹8,334 per month (₹3,00,000 ÷ 36). But his bank quoted ₹10,120. It’s not just a calculation problem; it’s a misunderstanding of the concept itself. 

Here’s how his world is so different from the reality he lives in (at least physically):
 

EMI isn’t just about dividing the loan amount by months. It includes interest and the structure that can change what you repay. Understanding these structures can help you choose the right lender, negotiate better, and save thousands. So, let’s educate ourselves regarding EMIs in this blog.

What Is an EMI and How Is It Calculated?

So, let’s start from the basics. An Equated Monthly Instalment (EMI) is a fixed monthly payment that combines both principal and interest that you pay over the loan tenure. ‘Itna samjhe?’

Now, the standard EMI formula is:   EMI=P×r×(1+r)N/ (1+r)N−1 ​

• P = principal loan amount
   
• P = principal loan amount
   
• r = monthly interest rate (annual ÷ 12)
   
• N = total months of repayment 

For example, you take a personal loan of ₹3,00,000 at an annual interest rate of 12% for 3 years (36 months).

First, break it down:

• P = ₹3,00,000 (principal)
   
• Annual interest rate = 12%, so monthly interest rate (r) = 12% ÷ 12 = 1% or 0.01
   
• N = 3 years = 36 months
   

Now apply the formula: EMI=3,00,000×0.01×(1+0.01)36/ (1+0.01)36−1​

Your monthly EMI will be ₹9,964. Over 36 months, you’ll pay a total of ₹3,58,715, which includes ₹58,715 as interest.
 

Key Components Influencing EMI

Three main factors directly shape your EMI. To give you details on each and meet the set word count limit, I have curated a table for you guys:
 

For example, Ravi is considering a personal loan to fund his sister’s wedding. He checks with his bank and gets the following options:

• Loan Amount: ₹3,00,000
   
• Interest Rate: Varies from 11% to 13% depending on the lender
   
• Tenure: Can choose between 2, 3, or 5 years
   

Ravi wants to understand how much his monthly EMI and total repayment would differ based on each component. So, his friend made a comparative table for him, which is as follows:
 

Reducing-Balance vs. Flat-Rate

When you repay a loan through EMIs, the way interest is calculated over time changes the total repayment. Flat-rate loans charge interest on the full amount throughout, while reducing-balance loans charge interest only on the remaining balance. 

This means flat-rate loans can make you pay 1.7 to 1.9 times more interest for the same loan amount and tenure. For more details, refer to the table given below: 
 

For example, Sonal took a ₹2,00,000 personal loan. One lender offered her a flat-rate loan at 10%, and another offered a reducing-balance loan at the same rate over 2 years. Let’s calculate both. 

1. Flat-Rate Method Calculation

Formula:  Interest = (Principal × Rate × Tenure)

• P = ₹2,00,000
   
• R = 10% annually
   
• T = 2 years

    Interest=2,00,000×10%×2=₹40,000

• Total repayment = ₹2,00,000 + ₹40,000 = ₹2,40,000
• EMI = ₹2,40,000 ÷ 24 = ₹10,000 per month

   2. Reducing-Balance Method Calculation

Formula:   EMI=P×r×(1+r)N/ (1+r)N−1 ​

Where:

• P = ₹2,00,000
   
• r = Monthly interest = 10% ÷ 12 = 0.008333
   
• N = 24 months

EMI=2,00,000×0.008333×(1+0.008333)24​ / (1+0.008333)24−1

EMI ≈ ₹9,229

Total repayment = ₹9,236 × 24 = ₹221,496
Total interest paid = ₹21,496
 

Conclusion

From basic formulas to its types and calculations, we have included everything in this blog. Trust me, just by understanding these basics, you can save thousands. Most people blindly sign loan papers without knowing what they’re getting into, and then wonder why they’re always broke by the 10th of every month. But not you, not after this blog. So, don’t just assume the EMI amount is “manageable.” Run the numbers, check your budget, and plan it right.

Because let’s be honest, impulse EMIs can totally mess up your adulting game. Don’t let yesterday’s decisions haunt your tomorrow!

Frequently Asked Questions

 1. What are the two types of EMI?

There are EMIs paid at the month-end and an EMI in advance (first instalment deducted upfront).

2. What is PMT in EMI?

In Excel, the PMT function calculates the EMI amount, where “M” is the monthly interest, “T” is the tenure, and “P” is the principal.

3. Can I pay a personal loan EMI in advance?

Yes! Many lenders offer advance EMI payments 4+ days before the due date. They’re adjusted against the next EMI.

4. What is the EMI rule for a personal loan?

EMI structure uses fixed monthly payments combining interest and principal over tenure. First EMIs carry higher interest and gradually shift towards principal repayment.

5. Is EMI the same for credit cards and loans?

No, credit card EMIs often carry higher interest and shorter durations than loan EMIs.

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?