EMI is an oft repeated term that is associated with any loan taken. Let us understand how EMI works and what are the different aspects associated with EMI. The EMI facility helps the borrower plan his budget. The EMI is calculated taking into account the loan amount, the time frame for repaying the loan and the interest rate on the borrowed sum.
An equated monthly installment (EMI) is the amount of money that is paid back to the lender on a monthly basis. It is essentially made up of two parts, the principal amount and the interest on the principal amount divided across each month in the loan tenure. The EMI is always paid up to the bank or lender on a fixed date each month until the total amount due is paid up during the tenure.
Now, you might assume that the equal parts of the principal and interest is repaid to the financial institution every month, however this not the case. During the initial years the interest component repaid is higher and during the latter years of repayment the principal component is higher. So, if you think you have paid half of the amount borrowed from the bank in 5 years in a 10 year loan tenure, that would not be the case. You would probably have reduced the total interest component due considerably and would have only repaid the interest component.
Here is a simple example that explains how the repayment of your EMI reduces your loan amount during repayment period leading up to the end of the loan tenure.
Here the loan amount is 100000, which is lent at a interest rate of 12% with a loan tenure of 12 months.
The monthly EMI is calculated at the annualized rate of 12% and amounts to Rs.8,885 per month with the total interest component amounting to Rs.6619.
You will notice that the Interest repaid decreases with each passing month and the principal repaid increases with each passing month. This means that with a larger loan amount of say 5 L with a longer tenure of 20 years, the interest component will be the greater portion of the EMI, which will reduce leading up to the loan tenure, while the reverse is true for the principal component.
Amortization Table
|
Month no. |
Outstanding amount |
Interest paid this month |
Principal paid this month |
EMI Payment for this month |
|
1 |
100,000 |
1,000 |
7,885 |
8,885 |
|
2 |
92,115 |
921 |
7,964 |
8,885 |
|
3 |
84,151 |
842 |
8,043 |
8,885 |
|
4 |
76,108 |
761 |
8,124 |
8,885 |
|
5 |
67,984 |
680 |
8,205 |
8,885 |
|
6 |
59,779 |
598 |
8,287 |
8,885 |
|
7 |
51,492 |
515 |
8,370 |
8,885 |
|
8 |
43,122 |
431 |
8,454 |
8,885 |
|
9 |
34,668 |
347 |
8,538 |
8,885 |
|
10 |
26,130 |
261 |
8,624 |
8,885 |
|
11 |
17,507 |
175 |
8,710 |
8,885 |
|
12 |
8,797 |
88 |
8,797 |
8,885 |
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good info
Hi Salute,
You said ” The interest component will be the greater portion of the EMI, which will reduce leading up to the loan tenure, while the reverse is true for the principal component.”
How this is calculated? Any formulas or… in what basis they calculating the same.
If i get the answer for the same, i am really happy.
Good information
Thanks
Hi Fish,
Thanks for the note. You can log on to our website bankbazaar.com and check out our EMI calculator tool. It is a very useful tool, that will help you understand how this works. Keep checking our guide for more such articles, which will explain the logic involved. Thanks.
Hi Fish,
Here is the formula that you requested.
EMI = LI * ( [ (1+I) ^ T ] / [ ( 1+I) ^ T - 1] )
Where
L - Loan Amount
I - Interest Rate per Month (12 % of Annual rate is equivalent to 1% of Monthly rate i.e. divide the Annual rate by 12 to get monthly rate)
T - Tenure in Months
It is a very nice tool. Can you tell me if a Pre-EMI is given for a part disbursement home loan, how does it works? Is the entire Pre-EMI amount cosiderable for final EMI calculation or what?
got a good information.
good information
its informative
what is emi is unknown to many. it’s easy monthly instalments. there are more than 21 nationalised banks. some are agricultural banks .thers are industrial. For a nation to co-exist boththe sector banks are essential. government goes through the accounts of these banks decide on the priority of which bank s assume the the importance of the first nationalised, secondetc. banks cater to the finance of people% regularly check whether the finance is invested in the proper manner and certify.the growth of finance makes a prosperous nation and the economics of a nation is of utmost importance for the progress of humanity. the earlier19th century is over. we are moving on to the next century the 20th.there must be a change through every sector. the smooth going of the century much depends on the changing attitude and a civilised society.
if the loan amt is 20 lacs for 20years what will be the EMI? can pls tell me
if the loan amt is 20 lacs for 20years what will be the EMI? can pls tell me
hello sir i am worked in jkk software i want personal loan amount rs 50000 plz to send mail and emi
hello sir i am astudent . and i want to 2 lakh ruppes loan for education. so plz send me mail
please detail home loan
I would like to know for one year EMI, when we make down payment to close the loan account- for example 6 months in advance, does the bank include the interest of 12 months. Kindly reply
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please can u provide the formula for emi calculation if u do so i will be vey happy
Hi,
I hv taken a loan of rs. 1 lac, loan tenure of 36 months, also am paying an installment of rs. 4595/month, please provide me the actual rate of interest, since it is a privatised bank am not clear abt the interest, and also if i close the loan within 2 years is that works for me and how much do i pay extra if i pre close. kindly revert.