What is an Equated Monthly Installment (EMI)?
An Equated Monthly Installment (EMI) is a fixed monthly payment amount made by a borrower to a financial lender on a specific date each calendar month. EMIs are structured to pay off both monthly interest and principal balance over a specified tenure so that the loan balance amortizes to zero upon the final installment.
Mathematical Formula for Calculating EMI
The standard universal financial formula for calculating monthly EMI is:
$$E = P \times r \times \frac{(1+r)^n}{(1+r)^n - 1}$$
Where:
- E: Equated Monthly Installment.
- P: Principal Loan Amount borrowed.
- r: Periodic monthly interest rate (\(\text{annual rate} / 12 / 100\)).
- n: Total number of monthly installments (\(\text{years} \times 12\)).
Understanding the Amortization Curve
In early loan installments, a larger portion of your EMI goes toward paying accumulated interest because the outstanding principal balance is at its peak. Over time, as principal is gradually reduced, the interest component decreases and the proportion of your monthly payment allocated toward principal repayment accelerates.