EMI stands for Equated Monthly Installment — the fixed amount you pay a lender every month until a loan is fully repaid. It includes both a principal portion and an interest portion, and the split between the two changes every month even though the total payment doesn't.
The formula
EMI = P × r × (1+r)ⁿ / ((1+r)ⁿ - 1), where P is the principal, r is the monthly interest rate (annual rate ÷ 12 ÷ 100), and n is the number of months.
This is a standard reducing-balance amortization formula — the same one banks use — so for a given principal, rate, and tenure, the mathematical result is exact. Your actual bank debit can still differ slightly if the lender adds processing fees or bundles insurance into the EMI.
Why early payments are mostly interest
Interest is charged on whatever principal is still outstanding, and that balance is largest right at the start of the loan. As you pay down principal, the outstanding balance shrinks, so each successive EMI contains slightly less interest and slightly more principal — the composition shifts every month even though the total EMI stays fixed.
Worked example
A ₹50 lakh home loan at 8.5% annual interest for 20 years: r = 8.5/12/100 ≈ 0.00708, n = 240 months. Plugging into the formula gives an EMI of roughly ₹43,391/month — and over 20 years, total interest paid ends up close to the original principal itself, which is what a longer tenure costs you.
Flat rate vs. reducing balance
Reducing balance (what home loans and this calculator use) charges interest only on the outstanding amount. Flat rate charges interest on the full original principal for the entire tenure, even as you pay it down — a "10% flat" loan works out close to 17-18% reducing balance in real cost. Always ask which method a quoted rate uses before comparing offers.
Shorter vs. longer tenure
A shorter tenure means a higher monthly EMI but dramatically less total interest paid, because you're carrying the outstanding balance for less time. A longer tenure eases monthly cash flow but increases the total cost of the loan substantially — a good rule of thumb is to pick the shortest tenure whose EMI still fits comfortably in your monthly budget.