How to Calculate a Loan Payment (EMI): Formula, Example and Tips

What is an EMI?

An EMI is a fixed amount that you pay to the lender every month until the loan is fully repaid. Each payment has two parts. One part pays the interest for that month, and the other part reduces the amount you still owe, which is called the principal.

At the start, most of each payment goes to interest. As the balance falls, interest takes a smaller share and more of the payment reduces the principal, even though the total payment stays the same.

The EMI formula

For a loan with a reducing balance, the monthly payment is: EMI = P x r x (1 + r)^n / ((1 + r)^n - 1).

• P. The loan amount, also called the principal.
• r. The monthly interest rate as a decimal. Divide the yearly rate by 12, then by 100. A yearly rate of 12 percent gives r = 12 / 12 / 100 = 0.01.
• n. The number of monthly payments. A loan for 2 years has n = 24.

Worked example: a 12-month loan

Suppose you borrow 100,000 at 12 percent a year and repay it over 12 months. The monthly rate is r = 0.01 and n = 12. First work out (1.01)^12, which is about 1.126825. Then:

EMI = 100,000 x 0.01 x 1.126825 / (1.126825 - 1) = 1,126.825 / 0.126825, which is about 8,884.88 per month.

Over 12 months you pay about 8,884.88 x 12 = 106,618.56 in total. The interest cost is about 6,618.56.

How the loan term changes the cost

Now take the same 100,000 at 12 percent, but repay it over 24 months. With n = 24, the EMI falls to about 4,707.35 per month. The payment looks much easier, but you pay 4,707.35 x 24 = 112,976.40 in total, so the interest rises to about 12,976.40.

That is almost double the interest of the 12-month loan. A longer term lowers the monthly payment but raises the total cost, because you owe money for more months. The right balance is the shortest term you can pay comfortably.

How to calculate your EMI step by step

• Step 1: Note the loan amount. Use the amount you will actually borrow, after any down payment.
• Step 2: Find the yearly interest rate. Check the rate in your loan offer and note whether it is fixed or variable.
• Step 3: Choose the term in months. Multiply the years by 12. Three years is 36 months.
• Step 4: Use the formula or a calculator. Enter the amount, rate and term in a loan calculator to get the monthly payment and total interest at once.
• Step 5: Compare offers. Run the numbers for each lender and compare the total you will pay, not only the monthly figure.

Reducing balance or flat rate?

With a reducing balance loan, interest is charged on the amount you still owe, so it falls as you repay. The EMI formula above is for this type.

With a flat rate loan, interest is charged on the full original amount for the whole term. For example, 100,000 at 6 percent flat for 2 years carries 12,000 of interest, so the EMI is (100,000 + 12,000) / 24, which is about 4,666.67. This looks cheaper than a reducing balance rate of 6 percent, but it is not. Because you keep paying interest on money you have already repaid, the true yearly cost can be close to double the flat rate. Always ask for the effective yearly rate before you compare.

What affects your monthly payment?

• Loan amount. A larger loan means a higher EMI. A bigger down payment lowers it.
• Interest rate. Even a small difference in the rate changes the total cost over many years.
• Loan term. A longer term lowers the EMI but raises the total interest.
• Fees and charges. Processing fees, insurance and other charges can add to the real cost of the loan.
• Fixed or variable rate. With a variable rate, your EMI or your term can change when the rate changes.

Ways to reduce the cost of a loan

• Pay a larger down payment. Borrowing less means paying less interest.
• Choose the shortest term you can afford. Keep the monthly payment comfortable, because missed payments bring penalties.
• Compare the total cost. Compare the full amount you will pay across lenders, including fees.
• Ask about early repayment. If you can pay extra, check whether the lender allows it and whether there is a penalty.
• Read the full agreement. Check the rate type, fees, late-payment charges and any insurance before you sign.

Common loan calculation mistakes

• Looking only at the monthly payment. A low payment can hide a long term and a high total cost.
• Using the yearly rate as the monthly rate. The formula needs the monthly rate, which is the yearly rate divided by 12.
• Ignoring fees. A loan with a low rate but high fees can cost more than one with a slightly higher rate.
• Comparing a flat rate with a reducing rate. They are calculated differently, so the same number means a different cost.

Estimate your payment now

Use our free loan calculator to estimate your monthly payment and total interest. It is free and needs no signup. The results are estimates only. Your lender's offer may include fees, insurance or a different way of working out interest, so always check the final figures in your loan agreement.

Frequently asked questions