EMI Calculator

EMI - equated monthly instalment - is a fixed payment covering both principal and interest, set so that the loan is fully repaid by the end of the term. Because the interest charge falls as the balance falls, the split changes every month even though the payment does not.

• P - the principal borrowed.
• r - the interest rate per period. If the rate is quoted annually at 12%, use 0.12/12 = 0.01 per month. Using the annual rate directly is the single most common error.
• n - the total number of instalments. A 5-year loan paid monthly is 60.

The formula assumes the rate never changes, that payments arrive on schedule, and that there are no fees folded into the principal. Any of those three being different will move the real figure.

Two different interest methods share the same headline percentage, and they are not remotely equivalent. This distinction matters most on vehicle and personal loans, where both structures are advertised.

On the same quoted 10%, the flat method costs 85% more in interest. The reason is that flat interest is calculated on the original principal for the whole term, even as you repay it - you are charged interest on money you have already given back.

Note. To compare fairly, ask what the equivalent reducing-balance rate is. A 10% flat rate typically corresponds to roughly 18% on a reducing balance over three years. Always compare on the reducing-balance equivalent or on the total amount repaid, never on the quoted rate alone.

In month one, just over 11% of the payment reduces the debt. By the final month, 99% of it does. Nothing about the payment changed - only the balance behind it.

This is why paying off a loan early saves more in the early years, and why a prepayment penalty exists: the lender's return is concentrated at the front.

• Origination and processing fees - often 1-3% of the principal, deducted before you receive the money. Borrowing $10,000 with a 2% fee nets you $9,800 while interest accrues on $10,000.
• Insurance bundled into the loan - credit or loan protection sold with the product, which raises the balance and therefore the interest on it.
• Prepayment penalties - a charge for settling early. They protect the lender against the front-loaded return being cut short.
• Variable rates - the instalment is fixed only for as long as the rate is. Model the payment at the maximum the contract permits.
• Longer terms - a lower instalment almost always means more total interest. Compare on total repayment, not on the monthly figure.

1. Compare offers on total repayment over an identical term, not on the instalment. Two offers with the same EMI can differ by hundreds of dollars in total cost once fees are counted.
2. Ask for the reducing-balance rate whenever a flat rate is quoted.
3. Check whether extra payments reduce principal directly, and whether a fee applies.
4. Compute the effective cost including fees rather than the advertised rate.
5. Match the term to the asset. A long loan on a fast-depreciating vehicle regularly produces negative equity, where you owe more than the asset is worth.
6. Keep a repayment buffer. An instalment that consumes all available cash leaves nothing for the interruption that eventually happens.