An EMI (Equated Monthly Instalment) is a fixed monthly payment that repays your loan and its interest over the tenure. The formula every lender uses:
where P = principal, r = monthly interest rate (annual ÷ 12 ÷ 100), n = tenure in months.
Example: ₹5,00,000 at 12% for 5 years → r = 0.01, n = 60 → EMI ≈ ₹11,122. Over 60 months you pay about ₹6.67 lakh — ₹1.67 lakh of it interest.
Reducing balance: why early EMIs feel useless
Interest each month is charged on the outstanding balance. Early on, the balance is large, so most of your EMI is interest and little touches the principal. In the ₹5 lakh example, the first EMI contains ₹5,000 interest and only ₹6,122 principal; by the final year that reverses. This is why prepaying early in the tenure saves dramatically more than prepaying late — and why closing a loan halfway through means you've already paid most of its interest.
Flat rate vs reducing rate — the oldest trick in lending
Some lenders (especially for vehicle and small business loans) quote a flat rate, where interest is computed on the original principal for the whole tenure. A "10% flat" loan costs roughly the same as an 18–19% reducing-balance loan. Always ask: "Is this rate flat or reducing?" — and compare loans using APR or the actual EMI, never the headline number.
Tenure: the lever most people pull wrong
| ₹5L at 12% | EMI | Total interest |
|---|---|---|
| 3 years | ₹16,607 | ≈ ₹98,000 |
| 5 years | ₹11,122 | ≈ ₹1.67 lakh |
| 7 years | ₹8,826 | ≈ ₹2.41 lakh |
Longer tenure = smaller EMI but much more total interest. The practical strategy: choose a tenure whose EMI fits comfortably (lenders cap total EMIs near 50% of income), then prepay whenever cash allows — after checking foreclosure/prepayment charges. On floating-rate loans to individuals, RBI rules bar foreclosure charges; fixed-rate loans may carry them.
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Frequently asked questions
What is the EMI formula?
EMI = P × r × (1+r)ⁿ / ((1+r)ⁿ − 1), where P is the loan amount, r is the monthly rate (annual rate ÷ 12 ÷ 100) and n is the number of months. All standard lenders use this reducing-balance formula.
What is the difference between flat and reducing interest rates?
A flat rate charges interest on the full original principal for the entire tenure; a reducing rate charges only on what's still outstanding. A flat rate roughly doubles the effective cost — 10% flat ≈ 18–19% reducing. Compare loans on APR or EMI, not the quoted rate.
Is it better to prepay a loan early or late in the tenure?
Early. Interest is front-loaded under reducing balance, so prepayments in the first half of the tenure cancel far more future interest than the same amount paid later.
Does a longer tenure mean a cheaper loan?
No — it means a smaller EMI but more total interest, often dramatically more. Use longer tenure for affordability, then prepay to cut the real cost.
Solvifin is a loan-comparison and referral platform, not a lender. This guide is general information, not financial advice — final rates, eligibility and approval are always decided by the lender. RBI rules summarised here are simplified; refer to rbi.org.in for the authoritative text.