The short answer
EMI = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1), where P is the loan amount, r is the monthly interest rate (yearly rate ÷ 12 ÷ 100) and n is the number of monthly payments.
Borrowing 20,000 at 8% a year for 5 years gives an EMI of 405.53 a month, and 4,331.80 in total interest.
EMI — equated monthly instalment — is the fixed payment that repays a loan in full over its term. Each payment covers that month's interest plus a slice of the loan itself. Early on, most of it is interest; by the end, almost all of it is principal. Understanding that split is what lets you judge a loan offer properly — and spot the “flat rate” trick that makes some loans look far cheaper than they are.
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Working it out step by step
Loan of 20,000 at 8% a year for 5 years:
- 1Monthly rate: r = 8 ÷ 12 ÷ 100 = 0.006667.
- 2Number of payments: n = 5 × 12 = 60.
- 3(1 + r)ⁿ = 1.006667⁶⁰ ≈ 1.4898.
- 4EMI = 20,000 × 0.006667 × 1.4898 ÷ (1.4898 − 1) ≈ 405.53.
- 5Total paid: 405.53 × 60 = 24,331.80, so the interest is 4,331.80.
Where each payment goes
In month one, interest is 20,000 × 0.006667 ≈ 133.33, so only about 272 of the 405.53 pays down the loan. As the balance falls, the interest part shrinks and the principal part grows — the EMI stays the same.
That's why paying extra early in a loan saves so much: every bit of principal you clear stops attracting interest for all the remaining months.
The flat-rate trap
Some lenders — especially for cars, consumer goods and personal loans in some countries — quote a flat rate. It calculates interest on the original amount for the whole term, even though you're paying it back every month.
| 8% reducing balance | 8% flat | |
|---|---|---|
| Interest | 4,331.80 | 8,000.00 |
| Monthly payment | 405.53 | 466.67 |
| Equivalent reducing rate | 8% | about 14.1% |
Same headline number, nearly double the interest. When comparing offers, always ask for the rate on a reducing balance (or the APR), not a flat rate.
Paying extra: lower EMI or shorter loan?
When you make a part-prepayment, many lenders let you choose:
- Keep the EMI, shorten the term — saves the most interest, because the balance falls faster.
- Keep the term, lower the EMI — eases your monthly budget but saves less overall.
If the current payment is comfortable, shortening the term is usually the better deal. Check for prepayment charges first, especially on fixed-rate loans.
Checking a loan offer
- Compare the total amount payable, not only the EMI — a longer term always lowers the EMI.
- Add up processing fees and insurance bundled into the loan; they raise the true cost.
- Confirm the rate is on a reducing balance and whether it's fixed or floating.
- For home loans, the mortgage calculator includes taxes and insurance; for cars, the auto loan calculator handles trade-ins and sales tax.
Frequently asked questions
What is the EMI formula?
EMI = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1), with P the loan amount, r the monthly interest rate and n the number of months.
Does a longer tenure reduce EMI?
Yes, but it increases the total interest you pay, sometimes by a lot.
Is EMI the same every month?
For a fixed-rate loan, yes. With a floating rate, the EMI or the term changes when the rate changes.
What's the difference between flat and reducing interest?
Flat interest is charged on the original loan amount for the whole term; reducing interest is charged only on what you still owe. Reducing is much cheaper at the same headline rate.
OnlineToolPro Editorial Team
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The team behind OnlineToolPro. We write guides from building and testing these tools, and check platform rules against official documentation such as YouTube Help. When something changes, we update the article and its date.