Equated Monthly Installment (EMI) Formula
An Equated Monthly Installment (EMI) is a fixed payment amount made by a borrower to a financial lender at a specified date each calendar month. EMIs apply to both interest and principal each month so that over a specified number of years, the loan is paid off in full.
The mathematical formula is:
$$\text{EMI} = P \times r \times \frac{(1 + r)^n}{(1 + r)^n - 1}$$
Where:
- $P$: Loan Principal amount
- $r$: Monthly interest rate ($\text{Annual rate} / 12 / 100$)
- $n$: Loan tenure in total months
Key Differences Between EMI and Simple Interest
Unlike simple interest arrangements where interest is computed solely on the original initial capital, an EMI is computed on a reducing balance basis. As you pay off principal each month, the interest due for the next month is calculated only on the remaining unpaid principal.