Understanding Equated Monthly Installments (EMI)
An 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 fully paid off along with interest.
The Mathematical Formula
Banks calculate your EMI using the following standard compounding formula:
E = P × r × (1 + r)n / [(1 + r)n - 1]
- E = EMI (Your monthly payment)
- P = Principal Loan Amount
- r = Monthly Interest Rate (Annual Rate ÷ 12 ÷ 100)
- n = Loan Tenure in Months
The Amortization Reality
It is crucial to understand that your EMI remains constant throughout the loan tenure, but the proportion of principal and interest changes. During the initial years of a loan (especially 15 to 20-year home loans), a massive percentage of your EMI goes strictly towards paying off the interest. As the loan matures, the principal repayment component gradually increases.