EMI Formula: How To Calculate EMI With Example

An EMI (Equated Monthly Instalment) determines how much you repay every month on a loan. Knowing the EMI calculation formula helps you assess loan affordability and avoid repayment stress. Using the EMI formula, you can plan your finances better before applying for a home loan, personal loan, or car loan.

Key Highlights

• The EMI calculator formula is used to calculate fixed monthly loan repayments.
• EMI depends on three factors: principal amount, interest rate, and tenure.
• Banks and online tools use the same EMI calculator formula for accuracy.
• A longer tenure reduces EMI but increases total interest paid.

What is the EMI Formula to calculate monthly EMIs? 

When applying for a loan from a financial institution, you must pay an EMI or Equated monthly instalment. However, estimating how much you can actually afford to repay per month can be a challenging process. 

The basic EMI calculation formula is as follows:

E = P x R x (1+r)^n/((1+r)^N – 1, where 

E = Equated Monthly Instalment

‘P’ stands for principal amount

‘R’ denotes applicable rate of interest

‘N’ stands for the loan term or tenure

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 Rs 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,

N is 10 years or 120 months

R is 7.2% = 7.2/12/100 = 0.006

EMI = Rs 10,00,000 * 0.006 * (1 + 0.006)120 / ((1 + 0.006)120 – 1) = Rs 11,714.

Hence, you will be paying the EMI of Rs 11,714 every month for 10 years. Some lending institutions may show you the break up between the principal amount and interest rates to help you assess your EMI payments.

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:

Loan amount (Principal)

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

Interest rate

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

Loan tenure

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

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.

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.