EMI

Full form: Equated Monthly Instalment

Loans & Credit

EMI is the fixed monthly payment made to repay a loan. Each EMI consists of two components: interest on the outstanding principal and a portion of the principal. The total EMI stays constant throughout the loan tenure while the interest-principal split changes every month.

In detail

The word equated means every monthly payment is the same amount. However what the payment consists of changes every month -- the interest portion decreases as outstanding principal reduces, while the principal portion increases correspondingly.nnAll RBI-regulated bank loans in India use the reducing balance method -- interest is calculated only on the outstanding loan amount, not the full original loan. This is more borrower-friendly than the flat rate method.nnFactors affecting EMI: loan amount (higher = higher EMI), interest rate (higher = higher EMI), and tenure (longer = lower EMI but higher total interest paid).

Formula

EMI = P x r x (1+r)^n / [(1+r)^n - 1] P = Principal loan amount r = Monthly interest rate (annual rate / 12 / 100) n = Number of months Example: Rs 30L at 8.5% for 20 years: r = 8.5/12/100 = 0.007083 n = 240 EMI = Rs 26,035

Real-life example

🇮🇳 India example

Home loan Rs 40 lakh at 8.5% for 20 years. EMI = Rs 34,729/month. Total amount paid = Rs 83.35 lakh. Total interest = Rs 43.35 lakh. In month 1: interest = Rs 28,333 (82%), principal = Rs 6,396 (18%). In month 240: interest = Rs 243 (0.7%), principal = Rs 34,486 (99.3%).

Frequently asked questions

What happens if I miss an EMI? ▼
Missing an EMI triggers a late payment penalty (typically 1-2% per month on overdue amount), negatively impacts your CIBIL score, and can trigger default proceedings if multiple EMIs are missed. Contact your bank immediately if you anticipate difficulty.
Can I reduce my EMI mid-loan? ▼
You can reduce EMI by refinancing at a lower rate (balance transfer), making a partial prepayment and asking the bank to reduce EMI, or negotiating with your bank during financial hardship. Note: reducing EMI means paying more total interest; reducing tenure saves more money.