What is EMI and how to calculate it

An equated monthly instalment (EMI) is a fixed amount paid regularly to repay a loan over a specific tenure. It includes both principal and interest, ensuring structured repayment. EMIs make large expenses more affordable by breaking them into manageable payments, helping individuals maintain financial stability whilst meeting their obligations.

To get a personal loan with low EMIs, it is important to get a good deal on your interest rates. Having a good CIBIL Score and meeting other eligibility criteria is important to get the best possible deal on your personal loan. Bajaj Finserv Personal Loan comes with interest rates ranging from 10% to 31% p.a. Check your eligibility for personal loan using just mobile number and OTP – 100% online process. 

The full form of EMI is Equated Monthly Instalment. It refers to the fixed monthly payment made to a lender to repay a loan or debt, such as a home loan, car loan, or personal loan. It is a widely preferred repayment method as it enables individuals to afford costly purchases by breaking the payment into manageable instalments.

For instance, if you wish to buy a new car but lack sufficient funds, you can opt for a car loan and repay it through EMIs. To initiate this, you will need to make a down payment, which is an upfront lump sum paid from your own funds.

Understanding how EMIs function helps you make better financial decisions. Here's the step-by-step process:

• Step 1: Loan disbursal – The lender approves and disburses the loan amount to the borrower.
• Step 2: Fixed monthly payment – The borrower repays through Equated Monthly Instalments (EMIs), which remain constant.
• Step 3: Principal + Interest – Each EMI includes both principal repayment and interest charges.
• Step 4: Interest priority – In the early months, a larger portion goes towards interest.
• Step 5: Gradual shift – Over time, the principal component increases whilst the interest portion decreases.
• Step 6: Reducing balance method – Interest is recalculated on the outstanding loan balance after every payment.

EMIs are calculated using two primary methods—the Fixed-Rate Method and the Reducing-Balance Method. The choice of method impacts the overall interest paid and the EMI amount.

Fixed rate method

In the fixed-rate method, the interest is calculated on the entire loan amount for the loan tenure, and the EMI remains constant throughout the repayment period. The formula used is:

Fixed rate EMI formula

EMI = [P x R x (1+R)^N] / [(1+R)^N-1]

Where:
P = Principal amount
R = Monthly interest rate
N = Loan tenure in months

This method offers predictability, as you pay the same amount every month, regardless of the loan progress.

Reducing balance method

In the reducing-balance method, the interest is calculated only on the outstanding principal amount. As you pay each EMI, the principal reduces, resulting in a gradual decrease in the interest portion. The EMI still remains constant, but the interest paid decreases over time, whilst the principal repayment increases.

This method is more cost-effective for borrowers, as the total interest payable is lower compared to the fixed-rate method.

Pro tip: To ease the tedious task of manual calculation, 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.

• Loan amount: The principal amount borrowed directly impacts the EMI. Higher loan amounts lead to higher EMIs.
• Interest rate: The rate of interest charged by the lender plays a key role. A higher interest rate increases the EMI amount.
• Loan tenure: The loan duration affects the EMI. A longer tenure reduces the monthly payment but increases the total interest payable.
• Repayment method: Whether the interest is charged on a fixed-rate or reducing-balance method influences EMI calculations.
• Prepayment: If you make partial payments towards the principal, it can reduce the EMI or loan tenure.

By analysing these factors, you can choose the best loan repayment plan that suits your financial situation.

• Financial flexibility: EMIs allow you to afford big purchases without draining your savings at once.
• Fixed payment schedule: The structured monthly instalments make it easy to plan and manage finances.
• Affordable repayment: By dividing the loan into smaller monthly payments, EMIs reduce financial strain.
• Improves credit score: Timely EMI payments build a good credit history and improve your creditworthiness.
• Wide applicability: EMIs are available for various loans, including home loans, car loans, and personal loans.

With EMIs, you can achieve your financial goals without compromising your budget.

A loan EMI helps borrowers repay loans in fixed equated monthly instalments, ensuring financial stability. Understanding EMIs full form and structure aids in better financial planning.

Key features and benefits

• Fixed monthly payments – EMIs make loan repayment manageable with predictable instalments.
• Interest and principal component – Each EMI includes both principal and interest, reducing debt gradually.
• Flexible tenure – Borrowers can choose repayment terms based on their financial capacity.
• Better budgeting – Fixed EMIs help in planning expenses efficiently.
• Credit score improvement – Timely payments boost creditworthiness for future loans.

Understanding what EMI and its types is helps borrowers choose the right loan for their needs. EMI-based loans cater to various financial requirements, offering flexibility in repayment. Knowing EMIs full form and structure ensures better loan management.

Types of EMI loans

• Home loan EMI – Long-term financing for purchasing or constructing a home, with tenure up to 30 years.
• Personal loan EMI – Unsecured loan with fixed EMIs for funding expenses like medical emergencies or travel.
• Car loan EMI – Helps purchase a vehicle with structured repayments over a set period.
• Education loan EMI – Financial aid for students, often with flexible repayment post-course completion.
• Business loan EMI – Supports business expansion, equipment purchase, or working capital needs.

1. Select the appropriate tenure of the loan

Choosing the right tenure is crucial. A longer repayment period reduces monthly EMIs but increases overall interest costs, whilst a shorter tenure helps save on interest but increases monthly payments. Strike a balance that works for your financial situation.
 

2. Calculate EMIs before taking out a loan

Always calculate EMIs in advance using a personal loan EMI calculator. This free tool helps you estimate monthly instalments and interest, allowing you to plan finances better and choose the most suitable loan terms.
 

3. Negotiate the interest rate

A lower interest rate directly reduces EMI amounts and total repayment. Research rates, compare offers, and negotiate with lenders to secure favourable terms for effective financial management. A 1% difference in interest rates can save thousands over the loan tenure.
 

4. Make prepayments

Prepaying part of your loan reduces the outstanding principal and lowers EMIs. It also strengthens creditworthiness, but always assess your financial capacity before making a prepayment. Extra payments directly reduce the loan balance and future interest.

Managing equated monthly instalments (EMIs) wisely ensures financial stability and prevents debt burdens. Following best practices can help in timely repayments, whilst avoiding common mistakes reduces financial risks.
 

Dos - 

• Choose the right tenure: Select a repayment period that keeps EMIs affordable without excessive interest costs.
• Pay on time: Ensure timely EMI payments to maintain a good credit score and avoid penalties.
• Calculate in advance: Use EMI calculators to estimate payments before applying for a loan.
• Review your finances: Regularly assess your financial capacity and adjust loan terms if needed.
   

Don'ts - 

• Don't ignore hidden charges: Check for processing fees, penalties, and other costs before finalising a loan.
• Don't over-borrow: Take a loan based on repayment capacity to avoid financial strain.
• Don't miss EMI payments: Late payments attract penalties and impact creditworthiness negatively.
• Don't ignore rising interest rates: Monitor rate changes and refinance if better options become available.

EMIs are a practical solution for managing large expenses, enabling borrowers to repay loans through structured monthly payments. Understanding the factors that influence EMIs and choosing the right repayment method can help you save on interest and manage your finances effectively. Whether for a home, car, or personal loan, EMIs ensure affordability and financial discipline, making them an integral part of modern borrowing.

Bajaj Finance Limited offers a high-value personal loan with flexible repayment tenure and quick disbursal. 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.