How to calculate EMI on a loan (and why flat rates can mislead you)

The formula

For a loan with a fixed rate and equal monthly payments, the EMI is:

EMI = P x r x (1 + r)^n / ((1 + r)^n - 1)

P = loan amount
r = monthly rate (yearly rate / 12 / 100)
n = number of months

A worked example

Borrow 100,000 at 12% a year for 12 months. The monthly rate is 12 / 12 / 100 = 0.01. The EMI works out to 8,884.88. Over 12 months you pay 106,618.56, so the interest is 6,618.56.

You can skip the maths with the loan and EMI calculator. Enter the amount, the yearly rate and the term, and it shows the EMI, the total interest and a year-by-year breakdown.

Longer loan, lower payment, higher cost

Take 500,000 at 9% a year. Over 5 years the EMI is 10,379.18 and the total interest is 122,750.66. Stretch it to 10 years and the EMI falls to 6,333.79, but the total interest more than doubles to 260,054.64.

A lower payment feels easier, but you pay for it. Before you choose a longer term, check what the extra interest costs in total.

Flat rate versus reducing balance

Some lenders quote a flat rate. A flat 12% means 12% of the original amount every year, whatever you have already repaid. On 100,000 for one year that is 12,000 of interest, and the monthly payment is 9,333.33.

A reducing-balance rate charges interest only on what you still owe, which is the method the EMI formula uses. The flat 12% loan above has the same payments as a reducing-balance loan at about 21.5% a year. Always ask which one an offer uses, and compare loans on the same basis.

What else to check

• Processing or application fees, which add to the real cost.
• Whether the rate is fixed or can change.
• Charges for paying the loan off early.
• Insurance or other products added to the loan.

A word of caution

The calculator gives an estimate for a simple fixed-rate loan. Your lender's own schedule is the one that counts, and it can differ because of fees and rounding. This is general information, not financial advice.