How Loan EMI Is Calculated (and Why It Is Not Just Principal ÷ Months)
2026-06-03 · 6 min read
Your monthly loan payment is more than the amount divided by the term. Here is how EMI works and how to spot the true cost of a loan.
When you borrow money, you repay the principal plus interest. Because interest is charged on the outstanding balance, your monthly payment is not simply the loan amount divided by the number of months — it is calculated with the EMI formula.
The EMI formula
EMI = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1), where P is the principal, r is the monthly interest rate (annual rate ÷ 12 ÷ 100), and n is the number of monthly payments.
Why total interest matters more than the rate
A lower monthly payment often hides a longer term and far more interest overall. Two loans with the same rate but different terms can differ by thousands in total cost. Always compare the total payable, not just the monthly figure.
Shortening a loan term raises the monthly payment but usually slashes total interest. Even small extra repayments early in the term have an outsized effect.
A worked example
Borrow 20,000 at 7.5% over 5 years and the EMI is about 400 per month, with roughly 4,000 paid in interest over the life of the loan. Stretch it to 7 years and the monthly payment drops, but the total interest climbs.
Compare instantly
The Loan / EMI Calculator shows your monthly payment, total interest, and total payable as you adjust the amount, rate, and term — perfect for comparing offers side by side.