EMI (Equated Monthly Installment)
Also known as: Equated Monthly Installment, monthly loan installment
An EMI is the fixed monthly amount you pay to a lender to repay a loan over a set period, comprising both principal and interest.
An EMI keeps your monthly outflow predictable across the entire loan tenure, regardless of whether the loan is for a home, car, education, or personal use. The formula used is: EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where P is the principal, r is the monthly interest rate, and n is the number of monthly installments.
Each EMI splits into two parts: an interest component (paid to the lender for the privilege of borrowing) and a principal component (repaying what you borrowed). Early in the tenure, the interest portion is much larger than the principal portion. Over time, this gradually flips — by the final EMIs, you're paying almost entirely principal.
Loan tenure has an inverse relationship with EMI but a direct relationship with total interest. A longer tenure lowers each month's EMI but means you'll pay significantly more interest overall. A shorter tenure raises the EMI but cuts total interest dramatically. Use an EMI calculator to find a tenure that balances monthly affordability with total cost.
Most lenders allow prepayment, either by lowering the EMI or shortening the tenure. Shortening the tenure usually saves the most interest. Prepaying early in the loan delivers a much larger interest saving than prepaying near the end.