What it works out
An EMI is an equated monthly instalment: the level payment that clears a loan, with its interest, in a set number of months. The term is used widely in South Asia; elsewhere the same thing is simply the monthly repayment.
The payment stays the same but what it is made of changes. Each month interest is charged on what is still owed, and the rest of the payment reduces the loan. Early on most of a payment is interest, because the balance is large. As the balance falls the interest falls with it, and more of each payment comes off the loan. The list of every payment divided this way is the amortisation table.
This is why, at the same rate, a longer term lowers the monthly payment and raises the total cost: the balance stays higher for longer, so more interest is charged on it.
What the sum leaves out
- A fixed rate is assumed for the whole term. With a variable rate the payment or the term changes when the rate does.
- Fees, insurance and any charge for repaying early are left out. A loan offer states its own costs.
- Interest is taken monthly at one twelfth of the yearly rate. Some lenders work it out daily or by another convention, and their figures differ a little.
- Nothing is rounded. A lender rounds each payment to the smallest unit of the currency and adjusts the last one.
Questions people ask
- What does EMI stand for?
- Equated monthly instalment: a fixed payment made every month that covers the month’s interest and repays part of the loan, so that the loan is cleared by the last payment.
- Why is so much of an early loan payment interest?
- Interest is charged on the balance still owed, and at the start that is the whole loan. On 100,000 at 12% a year over twelve months the payment is 8,884.88 and the first month’s interest is 1,000. By the last month the interest is under 88.
- Does a longer loan term cost more in total?
- At the same rate, yes. The monthly payment is lower, but there are more payments and the balance falls more slowly, so the total interest is higher. The calculator shows both figures side by side.
Arithmetic on figures you supply, for study. Educational information, not investment advice or a recommendation to trade. It takes no account of your circumstances, and nothing typed into the calculator is sent or stored.