The EMI formula
Banks use the reducing-balance formula: EMI = P × r × (1 + r)n ÷ ((1 + r)n − 1), where P is the loan amount, r is the yearly rate divided by 12, and n is the number of months.
Worked example
A loan of 2,000,000 at 14% a year for 5 years gives a monthly rate of 1.1667% over 60 months. The EMI is about 46,537 a month. Over five years you repay about 2,792,190, of which about 792,190 is interest.
Ways to pay less interest
- Choose the shortest term whose instalment you can comfortably afford.
- Make part payments early in the loan, when they cut the most interest.
- Compare the total cost, including processing fees and insurance, not just the rate.