Equated Monthly Instalment (EMI)
An EMI is the fixed amount a borrower pays to a lender every month until the loan is fully repaid. Each EMI consists of two components: principal repayment and interest charge. In early months, the interest component is higher; over time, the principal component increases — an amortisation schedule.
EMI Formula
EMI = P x r x (1 + r)^n / [(1 + r)^n − 1]
Where P = Principal, r = Monthly interest rate (annual rate / 12 / 100), n = Total monthly instalments.
Interest Calculation Methods
Reducing Balance: Interest calculated on outstanding principal after each payment. Most common for home, personal, and car loans in India.
Flat Rate: Interest calculated on original principal for entire tenure. Results in higher effective rate. Sometimes used for small consumer loans.
Factors Affecting EMI
- •Higher principal → higher EMI
- •Higher interest rate → higher interest component
- •Longer tenure → lower monthly EMI but higher total interest paid
Pre-payment
Most lenders allow lump-sum pre-payments toward principal, which can shorten tenure or lower future EMIs. Some lenders levy pre-payment charges for fixed-rate loans.
EMI Bounce Consequences
A missed EMI is recorded in the borrower's credit report and may negatively affect the CIBIL score. Lenders typically levy a bounce charge, and repeated defaults may trigger penalty interest.