Money Basics · Big purchases

EMI math

EMI (Equated Monthly Instalment) is a fixed monthly payment that covers both principal repayment and interest. It sounds simple. The total amount you pay is anything but.

The formula

EMI = P × r × (1 + r)^n / [(1 + r)^n − 1]

Where P = principal, r = monthly rate, n = number of months.

You don't need to memorise this. But you need to understand what it implies: in the early years of a loan, most of your EMI goes toward interest, not principal repayment.

> A ₹30 lakh home loan at 7.5% for 20 years: EMI = ₹24,168. Total paid = ₹58 lakh. Interest paid = ₹28 lakh. Nearly as much as the loan itself. Home loans float against the repo rate, so run this at whatever rate you are actually quoted; the shape of the answer does not change.

The amortisation effect

Month 1: EMI = ₹24,168. Of this, ~₹18,750 is interest, ~₹5,418 is principal.

Year 5: still ~₹16,300 of each EMI is interest.

Year 11 onwards: principal repayment finally starts dominating.

₹28LInterest paid on ₹30L loan at 7.5% for 20 years

93%Additional amount paid over original loan amount

The prepayment strategy

Extra payments toward a loan reduce the principal, which reduces future interest. Prepaying ₹1 lakh in year 3 of the ₹30 lakh, 20-year loan above saves about ₹2.6 lakh in interest and takes 15 months off the tenure, provided the EMI stays where it is and the tenure shrinks, rather than the other way round.

Most banks allow prepayment on floating-rate loans without penalty.

Before taking any EMI

• Lenders underwrite to a fixed-obligation-to-income ratio: total EMIs at or under roughly 40% of take-home
• For a single large EMI such as a home loan, that band is usually 30–35% of take-home
• Always calculate total outflow, not just the monthly EMI

Takeaway. EMIs look small monthly but accumulate to massive totals. A ₹30L home loan can cost ₹58L over 20 years. Calculate total outflow before signing anything.