Every home, car, or personal loan comes down to one question: how much will you pay each month? That monthly payment is your EMI — Equated Monthly Installment — and it's calculated with a fixed formula every bank uses, not something they set arbitrarily.
The EMI formula
Banks use the reducing-balance method, where interest is charged only on the outstanding principal each month, not the original loan amount. The formula is:
EMI = P × r × (1+r)ⁿ / ((1+r)ⁿ − 1)
Where:
- P is the principal — the loan amount you borrow
- r is the monthly interest rate (annual rate ÷ 12 ÷ 100)
- n is the number of monthly installments (tenure in years × 12)
A worked example
Say you take a ₹25,00,000 home loan at 8.5% annual interest for 20 years (240 months). Plugging into the formula: the monthly rate r = 8.5 ÷ 12 ÷ 100 = 0.00708, and n = 240.
The result comes out to an EMI of roughly ₹21,696 per month. Over 20 years, you'd pay about ₹52.07 lakh in total — meaning ₹27.07 lakh of that is interest, more than the principal itself. This is exactly why tenure matters as much as the interest rate.
Why tenure changes the total interest so much
A longer tenure lowers your monthly EMI but sharply increases the total interest you pay, because you're borrowing the bank's money for longer. The same ₹25,00,000 loan at 8.5% over 10 years instead of 20 has a higher EMI (around ₹30,996/month) but cuts total interest to about ₹12.20 lakh — less than half of the 20-year version.
If you can comfortably afford a higher EMI, a shorter tenure is almost always cheaper in the long run.
Try it with your own numbers
Rather than doing this math by hand, use the EMI Calculator to instantly see your monthly payment, total interest, and total repayment for any loan amount, rate, and tenure. If you're planning to make a lump-sum prepayment later to close the loan faster, the Loan Prepayment Calculator shows exactly how much interest that would save.