EMI (Equated Monthly Installment) is a fixed amount you pay every month to repay your loan. It has two parts: interest and principal. The principal is the original loan amount you borrowed.The interest is the fee charged by the lender for giving you the loan. At the beginning of the loan term, a bigger share of the EMI goes towards interest. As you keep paying, the interest part reduces, and more goes into repaying the principal. Knowing this helps you understand how your loan is reducing over time.

This blog explains how one can calculate the interest and principal amount of EMI. 

What is an EMI?  

The full form of EMI is Equated Monthly Instalments. It is called “equated” since this amount is equally distributed for the entire loan term. This is the fixed monthly amount that the borrower must repay towards their loan. The EMI amount consists of part of the principal amount and the interest amount. Typically, the EMI remains constant throughout the loan tenure. In some cases, it may change if there is a revised interest rate or repayment term. 

Understanding Principal Amount and Interest Components

The EMI amount consists of the principal amount and interest amount: 

• Principal Amount: It is the initial loan amount that is offered to the borrower. This amount forms the base on which interest is calculated 

• Interest Components: It is the cost of borrowing that the borrower must pay each month. It is the percentage of the outstanding loan amount charged by the lender for the loan. For instance, the interest rate of 8% per annum means that for every ₹1,000 you borrow, you will need to pay an additional ₹80 as interest each year until the loan is repaid. 

Also Read: What is Personal Loan Repayment and Types of Loan Repayment Methods?

How Personal Loan EMI Interest is Calculated: Formula for Calculate EMI

The EMI formula can be calculated considering the principal amount, interest rate, and loan tenure 

Formula: EMI = [P × R × (1+R)^N] / [(1+R)^N-1] 

P: Principal loan amount 

R: Monthly interest rate  

N: Total number of months (loan tenure) 

Understanding EMI calculation is important to manage loan repayments and manage your finances effectively. 

Step-by-Step Guide to Calculate Principal and Interest  

Here is our guide to calculate the principal and interest components for each EMI: 

1. Gather the Loan Details

• Loan Amount (P): The total amount borrowed.   

• Annual Interest Rate (R): The percentage charged as interest per year.   

• Loan Tenure (N): Total repayment period in months.   

• EMI: Pre-calculated monthly installment. 

2. Calculate Monthly Interest Rate  

Divide the annual interest rate by 12 and convert it to a decimal:  

Monthly Interest Rate (r) = [Annual Interest Rate] / [12 *100]  

3. Calculate Interest for the Month 

Once the monthly interest is calculated, you need to subtract the monthly interest rate from the outstanding amount.  

[Interest] = [Outstanding Principal] * [Monthly Interest Rate] 

4. Calculate Principal Repayment for the Month 

After you get the principal repayment for the month,  

Principal = EMI – Interest 

5. Update the Outstanding Principal

[New Outstanding Principal] = [Previous Principal] – [Principal Repaid] 

EMI Calculation Example  

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

Where,  

P: is the principal amount  

N: is the loan tenure in months  

R: is the monthly interest rate 

Let us consider,  

• Principal (P): ₹5,00,000 

• Loan Tenure (N): 2 years (24 months) 

• Annual Interest Rate: 12% 

• Monthly Interest Rate (R): (12%)/12=1%=0.011 

EMI= [ 5,00,000 * 0.01 * (1+0.01)^24] / [(1+0.01)^24−1] 

Calculating step-by-step: 

1. (1+R)^N= (1+0.01)^24 = (1+0.01)^(24) = 1.2682 
2. Numerator: 5,00,000 * 0.01 * 1.2682 = 6,341 
3. Denominator: 1.2682−1= 0.2682 
4. EMI: 6,341/0.2682= ₹23,652 

Manual vs. Excel EMI Calculation  

Here’s a comparison of Manual vs. Excel EMI Calculation: 

Amortization Table: Month-by-Month Breakdown

The EMI that you pay has two components- principal and interest. At the beginning of the loan repayment schedule, a majority portion goes towards interest payment. It keeps reducing gradually, as the principal component goes up.  

Here is an example amortization table for Mr. X’s loan of ₹15,00,000 at a 12% annual interest rate for 5 years. We have considered the first 10 months in the table 

How Loan Tenure and Interest Rates Impact EMI

The loan tenure and interest rates impact the EMI that a borrower has to pay each month.  

Impact of Loan Tenure on EMI 

• Long Tenure: A longer loan tenure (5-10 years) reduces the monthly EMI because the loan amount is spread over more months. However, it results in higher total interest payments over the life of the loan. 

• Shorter Tenure: A shorter tenure increases the EMI because the loan amount must be repaid in fewer months. But the total interest paid overtime will be lower, as the loan principal is cleared faster. 

Example: 

Loan Amount: ₹10,00,000 

Interest Rate: 10% per annum 

EMI for 5 years: ₹21,278 

EMI for 10 years: ₹13,215 

Although the EMI for the 10-year loan is lower, the total interest paid in the 10-year scenario will be higher. 

Impact of Interest Rates on EMI 

Changes in repo rate directly influence loan interest rates. If the RBI increases the repo rate, banks typically raise interest rates, leading to higher EMIs for floating-rate loans. Conversely, when the repo rate decreases, loan EMIs may reduce as banks pass on the benefit. Fixed-rate loans remain unaffected during their fixed term. 

Higher interest rates can lessen the demand for loans, impacting the borrower’s spending and investment. On the other hand, lower interest rates encourage borrowing, boosting economic growth 

For instance: You take a loan of ₹5 lakhs at an interest rate of 10% for a tenure of 3 years. The EMI for this loan would be approximately ₹16,134.  If the interest rate increases by 2% to 12%, the EMI rises to ₹16,611. That’s an additional ₹477 every month. This shows how even a 2% rise in interest rates can significantly affect your monthly budget, especially for short-term loans. 

To reduce the impact of changing interest rates, a borrower can opt for a longer loan tenure or make pre-payments to reduce the principal amount. 

Also Read: Long Term Personal Loans

Conclusion  

It is important to understand the components of a loan for effective EMI payments. While you can manually calculate interest rate and principal amount in EMI, you can use Zype’s EMI principal and interest calculator. Knowing how loan tenure and interest rate impact the EMI amount will help you select the right loan structure that best fits your financial needs.