How this number is made
An EMI is a fixed monthly payment that covers that month’s interest on the remaining balance and puts the rest toward principal. Early payments are mostly interest. Later payments are mostly principal. The rate has to be the reducing-balance rate, not a flat rate wearing the same name.
- Use the amount that will actually be disbursed, after any fee you refuse to finance.
- Confirm the rate is reducing balance. If the lender says “flat,” this page will understate the cost.
- Count the months on the sanction letter, not a rounded number of years you remember.
Formula
Monthly rate r = annual rate ÷ 12. EMI = principal × r × (1+r)^n ÷ ((1+r)^n − 1). Interest = EMI × months − principal.
Worked example
Borrow ₹1,000,000 at 8% reducing for 60 months and the EMI is ₹20,276.39. Interest over the loan is about ₹216,584. You pay about ₹1,216,584 in all.
Questions
What is the difference between flat and reducing?
Flat interest is charged on the original amount for every month, even after you have paid much of it back. Reducing interest is charged on what you still owe. A 8% flat loan is a much higher reducing-balance rate.
Does this include processing fees?
No. A fee paid in cash is a cost on top. A fee added to the principal should be typed into the amount borrowed, or the EMI will look too small.