Guide
How to Calculate Loan EMI: Formula and Worked Example
An EMI (equated monthly instalment) is the fixed amount you pay each month on a standard loan. This guide explains the formula in plain steps, works through an example, shows how each payment splits between interest and principal, and compares flat and reducing-balance rates.
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The EMI formula, step by step
The formula applies to a fixed-rate loan on a reducing balance: each month, interest is charged only on what you still owe, and the rest of your payment reduces the balance. Using Rs 500,000 at 15% for 3 years:
- Monthly rate: r = 15 ÷ 12 ÷ 100 = 0.0125.
- Number of months: n = 3 × 12 = 36.
- Growth factor: (1 + r)n = 1.012536 ≈ 1.5639.
- EMI: 500,000 × 0.0125 × 1.5639 ÷ (1.5639 − 1) ≈ Rs 17,332.66.
- Total paid: 36 instalments of Rs 17,332.66 come to about Rs 623,976 (Rs 623,975.91 using the unrounded instalment), so total interest is Rs 123,975.91.
If the rate is 0%, the formula does not apply and the instalment is simply the loan divided by the number of months: Rs 1,000,000 over 24 months is Rs 41,666.67 a month.
How each instalment splits into interest and principal
The instalment stays the same, but what it pays for changes. Early payments are mostly interest, because the balance is at its highest; later payments are mostly principal.
| Period | Interest (Rs) | Principal repaid (Rs) | Balance after (Rs) |
|---|---|---|---|
| Month 1 | 6,250.00 | 11,082.66 | 488,917.34 |
| Month 2 | 6,111.47 | 11,221.20 | 477,696.14 |
| Year 1 (months 1–12) | 65,465 | 142,527 | 357,473 |
| Year 2 (months 13–24) | 42,553 | 165,439 | 192,034 |
| Year 3 (months 25–36) | 15,958 | 192,034 | 0 |
Month 1’s interest is 1.25% of Rs 500,000 = Rs 6,250; the other Rs 11,082.66 of the instalment reduces the balance. On long loans the effect is much stronger: for Rs 5,000,000 at 18% over 20 years, the EMI is Rs 77,165.58, and the first payment is Rs 75,000 interest and only Rs 2,165.58 principal. Total interest over the 20 years is about Rs 13.5 million.
This is why paying extra early in a loan saves the most interest, if your lender allows early repayment without large charges.
Flat rate vs reducing balance
Some offers quote a flat rate, where interest is charged on the original amount for the whole term, even as you repay it. The same headline rate then costs much more:
| Method | Monthly instalment (Rs) | Total interest (Rs) |
|---|---|---|
| Reducing balance (EMI formula) | 17,332.66 | 123,975.91 |
| Flat rate: 15% × 500,000 × 3 years | 20,138.89 | 225,000.00 |
When comparing offers, ask whether the rate is flat or on a reducing balance, and compare the total amount repayable and the lender’s repayment schedule rather than the headline rate.
What the formula leaves out
- Fees and insurance: processing fees, insurance and taxes are not in the formula, but they add to what you pay.
- Variable rates: many loans are linked to a benchmark such as KIBOR in Pakistan. When the benchmark changes, the lender changes your instalment, the term, or both.
- Islamic financing: structures such as diminishing musharakah use rent or profit instead of interest; the monthly amounts can be calculated differently.
- Late and early payments: late-payment charges and early-settlement terms are set by each lender.
Use the formula to understand and compare, then check the lender’s own schedule before signing.
Calculate your own EMI
The Loan EMI Calculator uses the same reducing-balance formula. Enter the loan amount, the yearly rate from the offer and the term, and it shows the monthly instalment, the total interest, and a year-by-year repayment table like the one above. The rate you enter is your assumption, not an offer from any lender.
Common questions
What does EMI stand for?
Equated monthly instalment: a fixed payment made every month until the loan is repaid, covering both interest and principal.
How do I calculate EMI in Excel or Google Sheets?
Use =PMT(yearly rate/12, months, -loan amount), for example =PMT(15%/12, 36, -500000). The loan is entered as a negative number so the payment shows as positive2.
Why is my first EMI mostly interest?
Interest is charged on the balance still owed, which is highest at the start. As the balance falls, less of each instalment goes to interest and more to repaying the loan.
Does a longer term reduce the total cost?
No. A longer term lowers the monthly instalment but increases the total interest, because you owe money for longer.
Sources
- Wikipedia: Equated monthly installment — the standard EMI formula with a monthly rate and number of monthly payments.
- Microsoft Support: PMT function — syntax PMT(rate, nper, pv) and that a positive loan amount gives a negative payment.