How Loan EMI Is Calculated: Formula, Amortization & Examples

Commercial banks and NBFCs use the reducing balance formula: EMI = [P × r × (1 + r)^n] / [(1 + r)^n - 1] Where: - P = Principal loan amount borrowed - r = Monthly interest rate (Annual rate divided by 12 months, expressed as a decimal) - n = Loan tenure in number of monthly installments

Loan Details:
Principal (P) = ₹10,00,000 (10 Lakhs)
Annual Interest = 8.5%
Tenure = 5 Years (60 Months)

Calculation Steps:
Monthly Rate (r) = 8.5 / 12 / 100 = 0.0070833
Total Months (n) = 5 × 12 = 60
(1 + r)^60 = (1.0070833)^60 = 1.5273

EMI = [10,00,000 × 0.0070833 × 1.5273] / [1.5273 - 1]
EMI = 10,818.8 / 0.5273 = ₹20,517 per month

While your total monthly EMI remains constant throughout the loan term, the proportion allocated to interest versus principal changes every month: 1. Early Years: The outstanding balance is highest, meaning the majority of your EMI covers accrued interest. Only a small fraction reduces the principal balance. 2. Mid Tenure: The interest component decreases as principal is gradually paid down. 3. Late Years: The remaining principal is low, so the vast majority of your EMI goes directly toward wiping out the principal balance.

Because early EMI payments are heavily interest-weighted, making extra prepayments in the first few years of a long-term home loan yields massive savings. Every extra rupee prepaid goes 100% toward principal reduction, permanently lowering the compounding base for all future installments.