EMI Formula: How To Calculate EMI With Example

The EMI formula helps calculate the fixed monthly instalment payable on a loan. The EMI calculation formula considers the loan amount, interest rate, and repayment tenure to determine the monthly EMI. Using the EMI formula, you can plan your finances better before applying for a home loan, personal loan, or car loan.

EMI Calculation Formula:

EMI = [P x R x (1+R)^N]/[(1+R)^N-1] 

where 

• P = Principal loan amount, 
• R = Monthly interest rate
• N = Loan tenure (in months)

What is the EMI Formula to Calculate Monthly EMIs? 

An Equated Monthly Instalment (EMI) is the fixed amount paid every month towards repaying a loan. The EMI calculation formula is used by banks and financial institutions to calculate the monthly repayment based on the loan amount, interest rate and loan tenure.

The EMI formula is:

EMI = [P x R x (1+R)^N]/[(1+R)^N-1] 

Where:

• EMI = Equated Monthly Instalment
• P = Principal loan amount
• R = Monthly interest rate (Annual interest rate ÷ 12 ÷ 100)
• N = Loan tenure in months

Using the EMI calculator formula helps estimate monthly repayments accurately. By using this EMI formula, you can easily calculate the monthly instalment of your loan. However manual calculations are more prone to errors leading to a wrong decision. In such a case, an EMI calculator comes into play.

Formula for Online EMI Calculators

The mathematical EMI calculation formula mentioned above is considered and used by the entire financial industry for calculating the EMI for any loan amount. The online EMI calculator is adjustable; you can calculate the EMI payable by entering the values as per your preference. 

Online EMI calculators also work on the basis of this EMI calculator formula: 

EMI = [P x R x (1+R)^N]/[(1+R)^N-1] 

So to get a comprehensive understanding of these variables, let's discuss them in detail:

• R represents ‘rate of interest’. It is the interest rate that a lending institution charges for a loan. This rate of interest may vary depending on the lender; higher the rate of interest, higher will be the EMI amount. 
• P denotes your principal amount. It is the loan amount that you borrow from a lender. The lower the amount you borrow, the lower will be the EMI and vice versa.
• N indicates the loan tenure. It is the time within which you must repay the loan amount. This loan amount is inversely proportional to the EMI. This signifies that the longer your loan tenure, the lower will be the EMI and vice versa.

These are the factors on which your EMI amount depends. You can alter these values in the EMI calculator as per your loan details or preference. 

EMI Calculation Formula with Example

After learning about each variable, let's get a clear idea of how this EMI calculator formula works with an example.

Suppose you have availed a loan of ₹10 lakh to build a house. The lending institution has offered a loan with an annual interest rate of 7.2% for a tenure of 10 years. 

As per the EMI calculation formula, the monthly loan repayment amount will be:

P x R x (1+R)^N / [(1+R)^N-1] where,

Where:

• P = ₹10,00,000
• R = 7.2 ÷ 12 ÷ 100 = 0.006
  [The annual interest rate is converted into a monthly decimal rate before applying the EMI formula.]
• N = 10 × 12 = 120 months

Substituting these values into the formula:

EMI = [10,00,000 × 0.006 × (1 + 0.006)^120] ÷ [(1 + 0.006)^120 − 1]

EMI = [10,00,000 × 0.006 × (1.006)^120] ÷ [(1.006)^120 − 1]

EMI = (6,000 × 2.04892) ÷ (2.04892 − 1)

EMI = 12,293.52 ÷ 1.04892

EMI = ₹11,714.19

Hence, the monthly EMI payable will be ₹11,714 (rounded off). Some lenders may also provide an amortisation schedule showing how each EMI is split between the principal repayment and interest throughout the loan tenure.

Factors Affecting Your Monthly EMI Amount

With the current market rates, tenure and other factors, both the number of EMIs and the amount can change. The principal factors that can have an impact on your loan amount, as well as EMI, are as follows:

I. Loan amount (Principal)

Higher the principal amount, higher the EMI. Borrowing only what you need keeps EMIs manageable.

II. Interest rate

Even a small change in interest rate can significantly impact EMI, especially for long-tenure loans.

III. Loan tenure

A longer tenure reduces EMI but increases total interest paid over the loan period.

IV. Fixed or floating rate of interest on loans

The kind of interest paid on the loan is an important factor in determining your monthly EMI amount. 

• For instance, in case of a loan with a fixed rate of interest, EMI payments remain constant throughout the tenure. 
• Whereas the interest rate on loans with floating rates fluctuates in accordance with market rates.

V. Pre-closing or partial payments

It is another factor that affects your EMI payments. The principal amount of the loan gets reduced every time you make partial payments towards the loan. This leads to a reduction of the total interest that must be paid. 

• In most cases, if you are making a partial payment, you will be given an option of keeping the tenure or the EMI amount the same. 
• Your loan duration or tenure will decrease if the EMI is kept same. 
• In a similar way, your monthly payment obligation will reduce if the tenure stays the same.

Before applying for any loan, it is imperative to calculate your repayment amount to ensure that the EMI payments won’t strain your finances. Calculating EMI using the EMI calculation formula in advance ensures your monthly obligations stay aligned with your financial capacity.