How to Calculate EMI Formula (Step-by-Step)

EMI (Equated Monthly Installment) is calculated using a standard mathematical formula used by all banks and financial institutions for loans like personal loans, car loans, and home loans.

EMI Formula

EMI = \frac{P \times r \times (1+r)^n}{(1+r)^n – 1}

Meaning of Each Term

Step-by-Step Method to Calculate EMI

Step 1: Convert Annual Interest to Monthly Rate

If your interest rate is 12% per year:

Monthly interest rate = 12 ÷ 12 ÷ 100 = 0.01

Step 2: Convert Tenure into Months

If loan duration is 5 years:

n = 5 × 12 = 60 months

Step 3: Apply the Formula

Now plug values into the formula:

• P = loan amount
• r = monthly interest rate
• n = total months

Then calculate EMI using the formula.

Example Calculation

Let’s assume:

• Loan amount (P) = 500,000
• Interest rate = 10% per year
• Tenure = 5 years (60 months)

Step 1:

Monthly rate = 10 ÷ 12 ÷ 100 = 0.00833

Step 2:

n = 60

Step 3:

Apply formula → EMI ≈ 10,624 (approx.)

How EMI Works Internally

EMI is based on the reducing balance method, meaning:

• Interest is charged on remaining loan balance
• Early EMI payments include more interest
• Later EMI payments include more principal

Simple EMI Breakdown Table

Important Insight

Even a small change in interest rate or tenure can significantly change EMI:

• Higher tenure → lower EMI but more total interest
• Lower tenure → higher EMI but less total interest

Summary

To calculate EMI:

1. Convert interest rate into monthly rate
2. Convert tenure into months
3. Use EMI formula
4. Understand reducing balance effect