What is EMI and how to calculate it

Learn the meaning of EMI, how to calculate EMI and plan your repayment before taking out a loan.
What is EMI and how to calculate it
5 min read
17 July 2023

To make large expenses and commodities affordable and within reach to the masses, financial institutions often offer the customers the luxury of splitting those expenses into smaller repayments amounts, or as they are commonly called EMIs. Let’s take a closer look at what is an EMI and how it is calculated.

What is EMI?

When it comes to borrowing money, the term EMI is often used. EMI stands for equated monthly instalment, which refers to the fixed amount of money that a borrower must repay each month towards their loan. It consists of both the principal amount and the interest charged on the loan. The EMI, in most cases, remains constant throughout the loan tenure unless there is a change in the interest rate or the repayment terms.

Now that you know what an EMI is, let’s deep dive into the subject.

How does an EMI work?

Equated Monthly Instalments (EMIs) are a common method of repaying loans. The borrower pays a fixed amount each month, consisting of both principal and interest components. Initially, a larger portion goes towards interest, with the principal repayment increasing gradually. The EMI remains constant throughout the loan tenure, simplifying budgeting for borrowers. Lenders use the reducing balance method, recalculating interest on the outstanding principal. Early EMIs contribute more towards interest, while later ones focus on principal repayment. Understanding EMI helps borrowers plan repayments effectively and manage their finances, making significant purchases like homes or vehicles more accessible over time.

How is EMI calculated?

An EMI consists of two components – a portion of the principal amount borrowed, and a portion of the overall interest charged on the loan amount.

Let’s take a look at the formula of how an EMI is calculated.

EMI = P * r * (1 + r)^n / ((1 + r)^n - 1)

Here:

Principal Amount (P): The total amount of money borrowed or the loan amount.

Interest Rate (r): The annual interest rate charged by the lender.

Loan Tenure (n): The number of months or years for which the loan is taken.

Calculating EMI can be complex and time consuming. Moreover, manual calculation of EMIs may lead to errors and can have an adverse effect on your finances. To ease this tedious task, you can use our personal loan EMI Calculator. With this online tool, you only need to enter the loan amount you need, the prevailing interest rate and the tenure for which you need the loan. The tool automatically does the calculations and shows the possible EMI for the details entered.

Tips to lower your personal loan EMIs

Now that you know how personal loan EMI is calculated. Here are some tips that can help you in lowering your personal loan EMIs:

  • Select the appropriate tenure of the loan
    Choosing the right loan tenure plays a vital role in effectively handling your EMI payments. Opting for a longer duration reduces your monthly EMI but increases the overall interest expenses. Striking a balance between these two factors is crucial. People who want to prioritise lower monthly payments might opt for a longer repayment plan, while those aiming to minimise interest expenses might prefer a shorter tenure.
  • Calculate EMIs before taking out a loan
    It is recommended to perform thorough calculations and carefully plan your finances, EMIs, and loan duration before proceeding with the loan application. We provide a personal loan EMI calculator that helps you to conveniently estimate your monthly payments and interest rates. This user-friendly tool is readily available on our website and comes at no cost to you.
  • Negotiate the interest rate
    Engaging in negotiations to lower the interest rate can be a highly effective strategy for decreasing the monthly EMI repayments of a personal loan. The interest rate directly impacts the borrowing cost, and securing a lower rate can significantly reduce the total repayment amount throughout the loan tenure. Moreover, a reduced EMI can help you effectively manage your monthly finances and reduce the overall financial strain associated with the loan. It is important to research interest rates and find the best offer and negotiate with the selected lender to secure a favourable interest rate.
  • Make prepayment
    Prepayment refers to the act of repaying a portion or the entire loan amount before the end of the chosen loan tenure. This action significantly reduces the outstanding principal balance and later lowers the monthly EMIs, making the loan more manageable. Furthermore, making a larger down payment enhances your creditworthiness and increases the chances of loan approval at a reduced interest rate. It is crucial to thoroughly evaluate your financial situation and repayment ability before deciding on the prepayment amount.

Bajaj Finance Limited offers personal loans with a maximum amount of Rs. 40 lakh, with a repayment tenure of up to 96 months. To help you make informed decisions, we provide a personal loan EMI calculator that enables you to estimate your monthly EMIs in advance, allowing you to plan your loan repayment journey with foresight.

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