Short answer: EMI = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1). Borrowing 5,00,000 at 12% for 3 years costs 16,607 a month. Quoted as a flat rate, the same 12% costs nearly twice the interest.
An EMI (equated monthly instalment) is the fixed amount you pay every month until a loan is cleared. Each payment covers that month's interest first, and the rest reduces what you owe.
The formula
EMI = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1)
- P is the amount you borrow
- r is the monthly interest rate: the annual rate divided by 12, then by 100
- n is the number of monthly payments
A worked example
Borrow 5,00,000 at 12% a year for 3 years:
- r = 12 ÷ 12 ÷ 100 = 0.01
- n = 36
- EMI = 16,607 a month
- Total paid = 5,97,858, so the interest costs 97,858
Stretch the same loan to 5 years and the EMI falls to 11,122, but the total interest rises to 1,67,333. A lower EMI almost always means paying more overall.
Warning: A "12% flat" loan of 5,00,000 over 3 years charges 1,80,000 in interest, nearly twice the 97,858 of a 12% reducing-balance loan. Its true cost is about the same as a 21.2% reducing-balance loan.
Flat versus reducing balance
With reducing-balance interest, you pay interest only on what you still owe, so the interest part of each EMI shrinks over time. Most bank home and personal loans work this way.
With flat interest, you pay interest on the full original amount for the whole term, even after you have repaid most of it. It is common for vehicle loans and consumer finance, and the headline rate looks much lower than the real cost.
Always ask the lender for the reducing-balance or annual percentage rate, plus all fees, before comparing offers.
Questions people ask
Q: Does paying extra early reduce my interest?
A: On a reducing-balance loan, yes. Prepayments cut the amount you owe, so every later month charges less interest. Check whether your lender charges a prepayment fee first.
Q: Why is my first EMI mostly interest?
A: Interest is charged on the outstanding amount, which is highest at the start. As you repay, the interest part shrinks and more of each EMI goes to the loan itself.