EMI Guide – What Is EMI, How It Works & How to Reduce EMI

What Is EMI?

EMI stands for Equated Monthly Installment. It is a fixed amount that a borrower pays every month to repay a loan over a specified tenure. EMIs are commonly used for home loans, personal loans, car loans, education loans, and credit card purchases.

Each EMI consists of two components:

• Principal – The original loan amount
• Interest – The cost charged by the lender

How EMI Is Calculated

Most banks and financial institutions calculate EMI using the reducing balance method.

EMI = [P × R × (1 + R)^N] / [(1 + R)^N − 1]

Where:

• P = Loan amount (Principal)
• R = Monthly interest rate
• N = Loan tenure in months

Real EMI Calculation Example

Suppose you take a loan of ₹5,00,000 at an annual interest rate of 10% for a tenure of 5 years (60 months).

Your approximate EMI would be: ₹10,624 per month

This example shows how EMI helps spread repayment evenly across the loan tenure.

Factors That Affect Your Loan EMI

Loan Amount

Higher loan amounts result in higher EMIs. Borrow only what you actually need.

Interest Rate

Even a small difference in interest rate can significantly impact your EMI and total interest paid.

Loan Tenure

Longer tenure reduces EMI but increases the total interest paid over time.

Credit Score

A higher credit score helps you secure lower interest rates, which reduces EMI.

Flat Rate vs Reducing Balance Method

Flat Rate Method

Interest is calculated on the full loan amount throughout the tenure, resulting in a higher total interest cost.

Reducing Balance Method

Interest is calculated only on the outstanding loan balance, making it more cost-effective and transparent.

Most banks today use the reducing balance method.

Pros & Cons of Credit Card EMIs

Pros

• Easy affordability for large purchases
• Instant EMI conversion
• No collateral required
• Flexible short-term tenures

Cons

• Higher interest rates compared to loans
• Processing or conversion fees
• Reduced available credit limit
• Late payment penalties

How to Reduce Your EMI Legally

• Choose a longer loan tenure
• Make partial prepayments when possible
• Negotiate interest rate with the lender
• Improve your credit score
• Transfer loan to a lower-interest bank

Who Should Read This EMI Guide?

• First-time loan borrowers
• Home loan and car loan applicants
• Credit card users considering EMI options
• Anyone planning long-term financial commitments

Want instant EMI calculation? Use our EMI Calculator →

Important Disclaimer

The information provided on this page is for educational purposes only and should not be considered financial advice. EMI values may vary based on bank policies, interest rates, fees, and individual eligibility. Always consult your lender before making financial decisions.

Frequently Asked Questions (FAQs)

Is EMI the same every month?

Yes, EMI remains fixed in most cases, but the interest and principal portions change over time.

Can EMI change after loan approval?

EMI may change if the interest rate is floating or if the lender revises terms.

Is longer tenure always better?

Longer tenure lowers EMI but increases total interest paid.

Does prepayment reduce EMI?

Yes, prepayments reduce outstanding principal, which can lower EMI or tenure.