Glossary · Banking & Finance
EMI
Equated Monthly Installment — a fixed payment made by a borrower to a lender on a specified date each month.
An Equated Monthly Installment (EMI) is a fixed payment amount that a borrower agrees to pay to a lender on a specified date each month until the loan is fully repaid. The EMI consists of two components: the principal amount and the interest charged on the outstanding balance. In the early years of a loan, the interest component is larger, while the principal repayment is smaller — this proportion shifts over time (in the reducing-balance method). EMI is calculated using the formula: EMI = [P × r × (1+r)^n] / [(1+r)^n - 1], where P is the principal loan amount, r is the monthly interest rate (annual rate divided by 12), and n is the number of monthly instalments. EMI payments are typically due on a fixed date each month and can be made via auto-debit (NACH, ECS, or SI). Prepayment of the loan reduces the outstanding principal and can result in either a reduced tenure or reduced EMI. Banks and NBFCs in India offer EMI options for home loans, personal loans, car loans, education loans, and credit card EMIs. Some lenders also offer a step-up or step-down EMI structure to match borrower cash flows over time.
Examples
A home buyer borrows ₹50 lakh at 8.5% annual interest for 20 years (240 months). Using the EMI formula, the monthly instalment works out to approximately ₹43,391. In the first month, approximately ₹35,891 goes toward interest and ₹7,500 toward principal repayment — by the last month, this reverses with almost the entire ₹43,391 reducing the principal.