The formula
Indian banks use the reducing-balance method:
EMI = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1)
where P is the loan amount, r is the monthly interest rate (annual rate ÷ 12 ÷ 100) and n is the number of monthly instalments.
Worked example
A ₹10 lakh loan at 9% for 5 years: r = 9 ÷ 12 ÷ 100 = 0.0075 and n = 60. Plugging in gives an EMI of about ₹20,758. Over 60 months you repay ₹12.45 lakh, so the interest cost is roughly ₹2.45 lakh. You can check any combination with the EMI calculator.
Why early EMIs are mostly interest
Each month the bank first charges interest on the outstanding balance, and whatever is left of your EMI repays principal. At the start the balance is highest, so interest takes the biggest bite; by the final year almost the whole EMI is principal. That is why a prepayment in year one saves far more interest than the same prepayment in year four.
Three levers that actually lower your cost
- Tenure: a longer loan lowers the EMI but raises total interest — a 20-year home loan can cost more in interest than the house itself.
- Rate: even 0.5% matters on large loans. Compare banks, improve your credit score, and ask for a rate reset if your loan is linked to an external benchmark.
- Prepayment: most floating-rate loans to individuals carry no prepayment penalty. Small, early prepayments compound into big savings.
What the EMI doesn’t include
Processing fees (plus GST on them), insurance bundled with the loan, and late-payment charges are all on top of the EMI. Ask for the APR or total cost of the loan when comparing offers.