How is Your EMI Calculated? (A Simple Guide)

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Learn to calculate your EMI. Our simple guide explains the home, car, & personal loan formula, helping you budget and save money.

Introduction: The Most Important “Magic Number” in Your Budget

Hello, and a very warm welcome to Fiknow!

If you are planning to buy a home, a car, or even a new phone, there is one “magic number” you will hear everywhere: the EMI.

The bank manager will say, “Sir, your EMI will be ₹15,000.”

The car salesman will say, “Madam, you can get this car for a low EMI of just ₹8,000.”

But what is this EMI?

EMI stands for Equated Monthly Instalment.

That sounds complicated, right? Let’s make it simple. Think of it as an “Easy Monthly Instalment.”

It is the fixed amount of money you pay back to the bank every single month for a fixed number of years. It’s how we buy big, expensive things (like a house) by paying for them in small, easy pieces (like a pizza).

But how does the bank decide this number?

Why is your EMI ₹8,000 and not ₹7,000? How much “extra” money are you paying? And how can you calculate it yourself so the bank cannot cheat you?

This is your complete, A-to-Z guide.

We will not just give you a calculator. We will teach you how this “magic number” is born. We will explain the “secret formula” banks use, in language so simple a 5-year-old can understand.

This is a long, detailed guide. We want you to be an expert. By the end, you will be able to:

  • Understand the 3 “magic ingredients” of every EMI.

  • Know the “secret formula” and how it works.

  • Understand the most important part: where your EMI money goes every month.

  • Learn smart tricks to “beat” your EMI and save lakhs in interest.

A Very Important Note (Disclaimer):

We at fiknow.com are here to give you knowledge. This article is for information and education only. It is NOT financial advice. A loan is a big financial promise. This guide will help you plan your budget, but you must always read all loan documents from the bank very, very carefully before you sign.

Ready to become an EMI expert? Let’s begin.

Part 1: The 3 “Magic Ingredients” of Every EMI

 

Before we learn the “magic formula,” you must first understand the 3 “ingredients” that go into it.

Every EMI, for any loan in the world, is made from these three things.

Ingredient 1: The “Principal” (P)

 

  • What it means: This is the big, main loan amount you are borrowing.

  • Simple words: It’s the “money you get” from the bank.

  • Example:

    • If you buy a car and the bank gives you ₹5 Lakhs, your Principal = ₹5,00,000.

    • If you buy a house and the bank gives you ₹40 Lakhs, your Principal = ₹40,00,000.

  • The Rule: The bigger the Principal, the bigger your EMI.

Ingredient 2: The “Interest Rate” (r)

 

  • What it means: This is the “cost” of borrowing the bank’s money.

  • Simple words: It is the “rent” or “fee” you pay to the bank for using their money for so many years.

  • How it’s shown: It is always shown as a “percentage per year” (p.a. – per annum).

    • Example: The bank will say, “The interest rate is 12% p.a.“

  • The Rule: The higher the Interest Rate, the bigger your EMI.

Ingredient 3: The “Tenure” (n)

 

  • What it means: This is the total time you have to pay back the loan.

  • Simple words: It’s your “payment schedule.”

  • How it’s shown: It is usually shown in Years.

    • Example:

      • A Personal Loan might have a tenure of 5 Years.

      • A Car Loan might have a tenure of 7 Years.

      • A Home Loan has a very long tenure, like 20 Years.

  • The Rule: This one is a bit tricky.

    • A longer tenure (like 20 years) = a smaller EMI (but you pay more interest).

    • A shorter tenure (like 10 years) = a bigger EMI (but you pay less interest).

    • We will explain this big secret later in the guide.

So, EMI is just a “recipe” made from Principal (P), Interest Rate (r), and Tenure (n).

Part 2: Why You Can’t Just “Divide It”? (The “Interest” Trap)

 

This is the first big mistake everyone makes.

You think:

“Okay, I am taking a ₹1 Lakh loan. The interest is 10%. So I pay ₹10,000 interest. Total is ₹1,10,000. I will just divide this by 12 months.”

This is 100% WRONG.

Why? Because interest is not that simple.

You are forgetting one big thing: The bank charges you interest every single month on the money you still owe.

Let’s do a simple, 2-month example.

  • You take a ₹10,000 loan.

  • The interest is 1% per month.

  • Your EMI is ₹5,062. (Let’s see why).

Month 1:

  • Money You Owe: ₹10,000

  • Interest for Month 1: 1% of ₹10,000 = ₹100

  • Your EMI Payment: You pay ₹5,062.

  • How it’s split:

    • Part 1 (Interest): ₹100

    • Part 2 (Principal): ₹5,062 – ₹100 = ₹4,962

  • End of Month 1:

    • You have paid back ₹4,962 of the real loan.

    • Money You Still Owe: ₹10,000 – ₹4,962 = ₹5,038

Month 2:

  • Money You Owe: ₹5,038

  • Interest for Month 2: 1% of ₹5,038 = ₹50 (See? The interest is less!)

  • Your EMI Payment: You pay the same ₹5,062.

  • How it’s split:

    • Part 1 (Interest): ₹50

    • Part 2 (Principal): ₹5,062 – ₹50 = ₹5,012

  • End of Month 2:

    • Money You Still Owe: ₹5,038 – ₹5,012 = ₹26 (a small amount left).

This is called a “Reducing Balance” or “Reducing Interest.”

Because the “Principal” (the money you owe) gets smaller every month, the “Interest” part of your EMI also gets smaller.

This is why you cannot just “divide it.” It is a complex calculation. And for this, the banks use a “magic formula.”

Part 3: The “Magic Formula” Banks Use (The “Scary” Part Made Simple)

 

You are now ready to see the “secret formula.” It is used by every bank in the world.

It looks very scary. But we will make it simple.

Here is the formula:

$$EMI = P \times r \times \frac{(1+r)^n}{(1+r)^n – 1}$$

That’s it. It looks like a spaceship’s control panel, but it’s just our 3 “magic ingredients” (P, r, and n) in a special order.

Let’s break it down.

P = The “Principal”

  • This is the easy one. It’s the total loan amount.

  • Example: P = 5,00,000 (for a ₹5 Lakh loan)

r = The “Interest Rate” (The Tricky One)

  • This is the most important part.

  • The bank tells you the rate “per year” (p.a.). But your EMI is “per month.”

  • You must convert the yearly rate to a monthly rate.

  • How to do it: You just divide the rate by 12.

  • Example:

    • Bank says: 12% per year.

    • You do: 12% / 12 months = 1% per month.

  • And for the formula, you write 1% as a decimal: r = 0.01

  • Another Example:

    • Bank says: 9% per year.

    • You do: 9% / 12 months = 0.75% per month.

    • You write this as a decimal: r = 0.0075

n = The “Tenure” (The Other Tricky One)

  • The bank tells you the tenure in “years.” But your EMI is “per month.”

  • You must convert the years to months.

  • How to do it: You just multiply the years by 12.

  • Example:

    • Bank says: 5 year loan.

    • You do: 5 years x 12 months = 60 months.1

       

    • So, n = 60

  • Another Example (Home Loan):

    • Bank says: 20 year loan.

    • You do: 20 years x 12 months = 240 months.

    • So, n = 240

Let’s Do a Real Example (Manually!)

 

Let’s see if we can use this formula to calculate an EMI.

  • Loan: A Personal Loan

  • Principal (P): ₹1,00,000

  • Interest Rate: 12% per year

  • Tenure: 2 years

Step 1: Find our P, r, and n.

  • P = 1,00,000

  • r = 12% per year -> 12 / 12 = 1% per month -> 0.01

  • n = 2 years -> 2 x 12 = 24 months2

     

Step 2: Put the numbers in the formula.

 

$$EMI = 100,000 \times 0.01 \times \frac{(1+0.01)^{24}}{(1+0.01)^{24} – 1}$$

Step 3: Do the math.

  • 1 + 0.01 = 1.01

  • (1.01)^24 (This is 1.01 x 1.01 x 1.01… 24 times. This is why we use a calculator!) = 1.2697

  • 100,000 x 0.01 = 1000

Step 4: Put the new numbers in.

 

$$EMI = 1000 \times \frac{1.2697}{1.2697 – 1}$$
$$EMI = 1000 \times \frac{1.2697}{0.2697}$$
$$EMI = 1000 \times 4.7078$$

 

EMI = ₹4,707.8

Congratulations! You just calculated a real EMI.

This is the exact number the bank’s computer will give you.

You are now an expert.

Part 4: The “Easy Way” (How to Calculate EMI in 5 Seconds)

 

Now you know the secret formula.

But… do you have to do this “scary” math every time?

No. Nobody does.

Even the bank manager does not do this. They all use an “EMI Calculator.”

An EMI Calculator is just a simple website or app that has this formula inside it.

You just have to enter the 3 “magic ingredients” (P, r, and n) in the simple boxes.

  • Box 1: You enter the Loan Amount (Principal) (e.g., ₹50,00,000)

  • Box 2: You enter the Interest Rate (e.g., 8.5%)

  • Box 3: You enter the Tenure (e.g., 20 years)

  • You click “Calculate.”

The computer does the magic formula in 1 second and gives you the answer.

Let’s See the Calculator in Action (3 Examples)

 

Example 1: A Personal Loan

  • Principal (P): ₹3,00,000

  • Interest Rate (r): 14%

  • Tenure (n): 5 Years (60 months)

  • Your EMI will be: ₹6,983 per month

Example 2: A Car Loan

  • Principal (P): ₹8,00,000

  • Interest Rate (r): 9%

  • Tenure (n): 7 Years (84 months)

  • Your EMI will be: ₹12,852 per month

Example 3: A Home Loan

  • Principal (P): ₹40,00,000

  • Interest Rate (r): 8.5%

  • Tenure (n): 20 Years (240 months)

  • Your EMI will be: ₹34,704 per month

See how easy it is? The calculator is your best friend for planning your budget.

Part 5: The BIGGEST Secret: Where Does Your EMI Money Go? (The “See-Saw”)

 

This is the most important part of this guide.

You have calculated your EMI. Let’s use our Home Loan example:

  • Your EMI: ₹34,704

  • Your Loan: ₹40,00,000

  • Your Interest: 8.5%

You pay ₹34,704 to the bank. You think: “Great! I have paid ₹34,704 of my loan.”

WRONG.

A big part of that money is just the “rent” (the interest). Only a small part is the “real” loan (the principal).

This is called an “Amortization Schedule.” It’s a fancy word for the “EMI split.”

Let’s look at your very first EMI.

EMI #1:

  • You Pay: ₹34,704

  • Money You Owe: ₹40,00,000

  • Interest for Month 1: 8.5% per year on ₹40 Lakhs = ₹28,333

  • How it’s split:

    • Part 1 (Interest): ₹28,333

    • Part 2 (Principal): ₹34,704 – ₹28,333 = ₹6,371

Think about that. You paid ₹34,704, but your big ₹40 Lakh loan only went down by ₹6,371.

This is why home loans feel so slow!

This is the “EMI See-Saw.”

Imagine a See-Saw in a park.

  • In the first years of your loan:

    • The Interest part is very HEAVY (it’s a big part of your EMI).

    • The Principal part is very LIGHT (it’s a small part).

  • In the last years of your loan:

    • The Interest part becomes very LIGHT.

    • The Principal part becomes very HEAVY.

Let’s look at your Home Loan again (20 years):

EMI Payment Total EMI Paid Interest Part Principal Part Loan You Still Owe
EMI #1 ₹34,704 ₹28,333 ₹6,371 ₹39,93,629
EMI #120 (10 years) ₹34,704 ₹21,650 ₹13,054 ₹29,80,123
EMI #240 (Last EMI) ₹34,704 ₹244 ₹34,460 ₹0 (You are free!)

Look!

  • In your first EMI, you paid ₹28,333 in interest.

  • In your last EMI, you paid only ₹244 in interest.

This is the secret of all EMIs.

Part 6: Fixed vs. Floating EMI (A Key Choice)

 

When you take a loan, the bank will ask you this one big question.

1. Fixed Rate:

  • What it is: The interest rate is “locked” or “fixed” for the entire loan (e.g., 5 years).

  • Example: The rate is 12%. It will always be 12%. Your EMI will never change.

  • Good for: Personal Loans and Car Loans. These are short (3-7 years). A fixed rate gives you peace of mind.

  • Bad for: Home Loans. A fixed rate is always 1-2% higher than a floating rate.

2. Floating Rate:

  • What it is: The interest rate is “floating.” It can go up or down with the market (the RBI’s “Repo Rate”).

  • Example: You start at 8.5%. The RBI increases rates. Your rate goes up to 8.75%.

  • Good for: Home Loans. This is the standard for home loans. It is cheaper.

  • Bad for: People who get scared easily.

What happens when a Floating EMI changes?

  • Your rate goes up from 8.5% to 8.75%. The bank has two choices:

  • Choice 1 (Bad): They increase your EMI from ₹34,704 to ₹35,200.

  • Choice 2 (Common): They keep your EMI the same (₹34,704) but increase your tenure. Your 20-year loan will become a 21-year loan.

  • You must always check your loan statement!

Part 7: How to “Beat” Your EMI (Smart Tricks to Save Lakhs)

 

Now for the “pro” tips. You don’t have to be a slave to your EMI for 20 years. You can “beat” the bank and finish your loan early.

This is all about one simple idea: Pay back the “Principal” faster.

Remember the see-saw? The faster you reduce the Principal, the less “rent” (interest) you have to pay.

Smart Trick 1: Make a “Pre-Payment” (The #1 Trick)

 

  • What it is: A “pre-payment” is an extra payment you make.

  • Example: You get a ₹50,000 Diwali bonus.

  • The “Normal” Way: You spend it.

  • The “Smart” Way: You go to the bank and say, “Please take this ₹50,000 as a ‘principal pre-payment.'”

  • What happens?

    • Your ₹40 Lakh loan instantly becomes ₹39,50,000.

    • The bank will now calculate interest on a smaller amount.

    • The Result: You will save lakhs in interest and your 20-year loan might finish in 18 years!

  • Important: For Floating Rate Home Loans, the RBI says there is ZERO penalty for pre-payment. For Fixed rate loans, the bank can charge you a penalty.

Smart Trick 2: The “13th EMI” Trick

 

  • What it is: You have to pay 12 EMIs per year.

  • The Plan: At the start of the year, make one extra full EMI payment (a “pre-payment”).

  • The Result: Just by paying 13 EMIs instead of 12, your 20-year home loan can finish 4-5 years early!

Smart Trick 3: Increase Your EMI (The “Salary-Hike” Trick)

 

  • What it is: Your EMI is ₹34,704. You get a salary hike.

  • The Plan: Call your bank. Say, “Please increase my EMI to ₹38,000.”

  • The Result: That extra ₹3,300 is all going into your Principal. This is a super-fast way to close your loan early and save lakhs.

Smart Trick 4: Choose a Shorter Tenure (The “Brave” Trick)

 

  • What it is: When you take the loan, the bank offers you two choices:

    • Choice A: 20 years, EMI = ₹34,704

    • Choice B: 15 years, EMI = ₹39,500

  • The Plan: You choose Choice B. Your EMI is ₹5,000 more. It is harder.

  • The Result: You will be 100% debt-free in 15 years. You will save lakhs and lakhs in interest.

Part 8: Big EMI Mistakes to Avoid (The “Traps”)

 

Finally, let’s look at the 4 big traps people fall into.

Trap 1: The “Longest Tenure” Trap

  • The Mistake: You buy a car. The salesman says, “Sir, take a 7-year loan. Your EMI is only ₹8,000.” You think this is great.

  • The Trap: You will be paying interest for 7 full years. You will pay much more interest.

  • The Smart Move: Always ask, “What is the EMI for 5 years?” It might be ₹10,000. If you can afford it, take the shorter loan.

Trap 2: The “Pre-EMI” Trap (for Under-Construction Houses)

  • The Mistake: You buy a house that is still being built. The bank gives you a “Pre-EMI” option.

  • What it is: “Pre-EMI” means you only pay the interest part.

  • Example: Your loan is ₹40 Lakhs. Your Pre-EMI is ₹28,333.

  • The Trap: You pay this for 2 years. But your ₹40 Lakh Principal has not gone down by one rupee! You are just throwing money away as “rent.”

  • The Smart Move: NEVER choose Pre-EMI. Always ask the bank for a “Full EMI” from Day 1.

Trap 3: Forgetting the “Other” Costs

  • The Mistake: You take a loan. You forget about the Processing Fee (e.g., ₹20,000).

  • The Trap: The bank gives you the loan, but ₹20,000 is missing.

  • The Smart Move: Always ask about the “in-hand” loan amount after all fees are cut.

Trap 4: Missing Your EMI (The “CIBIL Killer”)

  • The Mistake: You forget to pay your EMI on time.

  • The Result: This is the biggest mistake of all.

    1. The bank will charge a Late Fee Penalty (e.g., ₹500 + 2% extra interest).

    2. The bank will report you to CIBIL. Your score will CRASH by 50-70 points.

  • The Smart Move: SET UP AUTO-PAY. Never, ever miss an EMI.

Conclusion: EMI is Your Friend, Not Your Master

 

You are now an expert. You know that EMI is not a scary, magic number.

It is a simple “recipe” with 3 ingredients: Principal, Interest, and Tenure.

You know the “secret formula” $EMI = P \times r \times \frac{(1+r)^n}{(1+r)^n – 1}$.

But more importantly, you know that an EMI Calculator is the easy way.

You know the biggest secret: The “See-Saw” (how your EMI is split) and why you pay so much interest at the start.

And you know the 4 smart tricks to “beat” your EMI and save lakhs.

An EMI is not a “trap.” It is a powerful tool. It is the tool that helps an ordinary Indian family buy their dream home, their first car, and build a better life.

By understanding how it works, you are no longer a “borrower.” You are a “Smart Financial Planner.”

Frequently Asked Questions (FAQ) Section

 

Q1: What is a “Pre-EMI”?

A: A “Pre-EMI” is an EMI where you only pay the interest part of the loan, not the principal. This is common in under-construction home loans. It is a bad idea, as your main loan amount does not decrease.

Q2: What is the difference between EMI and a credit card bill?

A: An EMI is a fixed payment for a loan. A credit card bill is a “revolving” payment. You only pay for what you spent. If you pay the “minimum due” on a credit card, you are charged a very high interest rate (30-40% per year). A loan EMI is much, much cheaper.

Q3: Can I pay my EMI with a credit card?

A: No. You cannot pay one loan (your EMI) with another loan (your credit card). The RBI does not allow this. You must pay your EMI from your savings account.

Q4: What happens if my floating rate changes? Does my EMI change?

A: When your floating rate goes up (e.g., from 8.5% to 8.75%), the bank has two choices:

  1. Increase your EMI (e.g., from ₹34,704 to ₹35,200).

  2. Keep your EMI the same, but increase your tenure (e.g., from 20 years to 21 years).Most banks do Choice 2 by default. You must call them to ask.

Q5: What is a “moratorium”?

A: A “moratorium” is a “holiday” from your EMI. The bank gives you permission to stop paying your EMI for a few months (e.g., 3-6 months) if you have a big emergency (like losing your job). But this is not free. The interest for those 3 months gets added to your main loan, making your loan bigger.

External Links (For Your Own Research)

 

We want you to be 100% informed. Here are some official links.

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