How to calculate EMI?

Calculating your loan’s EMI accurately helps you plan your budget and avoid surprises. In this guide, you’ll learn the EMI calculation formula, a step-by-step procedure, and an illustrative example to ensure you can compute your monthly loan repayment with confidence.

What Is EMI and Why It Matters

An Equated Monthly Installment (EMI) is the fixed payment you make every month towards repaying a loan be it a home loan, auto loan, or personal loan. EMIs combine both principal and interest components, ensuring the loan is fully paid off by the end of its tenure. Knowing how to calculate your EMI helps you:

• Compare loan offers from multiple lenders
• Plan your monthly budget effectively
• Understand how interest rate changes affect your repayments

EMI Calculation Formula

The standard formula to calculate EMI is:

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

Step-by-Step EMI Calculation

1. Determine the Principal (P): The total loan amount you need, e.g., ₹5,00,000.
2. Find the Annual Interest Rate (R): Your lender’s quoted rate, e.g., 10% per annum.
3. Convert to Monthly Rate (r):
   r = R / (12 × 100) = 10 / 1200 = 0.008333 (0.8333%)
4. Compute Total Number of Installments (n):
   If the tenure is 5 years:
   n = 5 × 12 = 60 months
5. Plug Values into the Formula:
   EMI = (500000 × 0.008333 × (1 + 0.008333)60) / ((1 + 0.008333)60 − 1)
6. Calculate Numerator and Denominator:
    
   • Compute (1 + r)n.
   • Multiply by P × r.
   • Subtract 1 from (1 + r)n.
   • Divide to get your monthly EMI.

Example: Calculating EMI for a ₹5 Lakh Loan

Let’s walk through a worked example:

• Principal (P): ₹500,000
• Annual Rate (R): 10%
• Monthly Rate (r): 0.10 ÷ 12 = 0.008333
• Tenure (n): 5 years × 12 = 60