Understanding EMI: Your Guide to Loan Repayments
Ever wondered what an Equated Monthly Installment (EMI) really is? This guide breaks down the components of an EMI, how it's calculated, and why it's a fundamental concept for any borrower.
What is an EMI?
An Equated Monthly Installment (EMI) is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. EMIs are used to pay off both interest and principal each month so that over a specified number of years, the loan is paid off in full.
The Two Components of EMI
Each EMI payment consists of two parts:
- Principal Repayment: The portion of the payment that goes towards reducing the outstanding loan amount.
- Interest Payment: The cost of borrowing the money, paid to the lender.
In the initial years of the loan, the interest component is much larger than the principal component. As the loan matures, the principal component grows larger while the interest portion shrinks.
How is EMI Calculated? A Practical Example
The mathematical formula to calculate EMI is:
EMI = P × r × (1 + r)ⁿ / ((1 + r)ⁿ - 1)Where:
- P = Principal loan amount
- r = Monthly interest rate (annual rate divided by 12)
- n = Loan tenure in number of months
Example Calculation
Let's say you take a loan with the following details:
- Principal Loan Amount (P): ₹10,00,000
- Annual Interest Rate: 8.4%
- Loan Tenure: 20 years
First, we convert the annual rate to a monthly rate (r) and tenure to months (n):
- r = 8.4% / 12 months / 100 = 0.007
- n = 20 years * 12 months/year = 240 months
Now, we plug these values into the formula. While the formula might seem complex, financial tools like our Loan Expert calculator do all the heavy lifting for you, giving you an EMI of approximately ₹8,618.
Ready to See it in Action?
Now that you understand the theory, use our powerful calculator to see your own amortization schedule and experiment with different scenarios.
Go to the Loan Calculator & Simulator