How Loan EMIs and Amortization Work
An Equated Monthly Installment (EMI) is a fixed monthly payment made by a borrower to a lender. Each payment is split into two parts: paying down the interest on the remaining loan, with the balance reducing your principal.
Frequently Asked Questions
How is Loan EMI calculated? ▼
Loan EMI is calculated using the standard formula: EMI = [P x r x (1 + r)^n] / [(1 + r)^n - 1], where P is Principal, r is the monthly interest rate, and n is the tenure in months.
Why is the interest portion high in the initial years? ▼
Interest is always computed on the total remaining principal balance. In early loan years, the outstanding principal is high, meaning most of your monthly EMI goes toward interest rather than principal reduction.
How do prepayments reduce loan interest and tenure? ▼
Every rupee made as a prepayment goes 100% toward reducing your outstanding principal balance (minus any foreclosure penalty charged). This immediately cuts down the base on which subsequent monthly interest is computed, shaving years off your tenure.
Are there prepayment penalties in India? ▼
Under RBI guidelines, banks and NBFCs cannot charge foreclosure or prepayment penalties on floating-rate loans given to individual borrowers for non-business purposes, which covers most home loans. However, car loans and personal loans are still commonly issued at fixed rates, where lenders can and often do charge a foreclosure fee, typically 2% to 5% of the outstanding principal. Always check your specific loan agreement.