EMI (Equated Monthly Installment) is the standard repayment structure for home loans, car loans, and personal loans in India and many Asian markets.
EMI Formula
EMI = [P × r × (1+r)^n] / [(1+r)^n − 1], where P = principal, r = monthly rate, n = total months.
Flat vs. Reducing Rate
- Flat rate: Interest calculated on original principal throughout (more expensive)
- Reducing rate: Interest calculated on outstanding balance (standard for banks)
A 10% flat rate is roughly equivalent to an 18–20% reducing rate. Always compare reducing rates.
EMI Prepayment
Making a lump-sum prepayment reduces either your tenure (loan finishes sooner, same EMI) or your EMI amount (lower monthly payment, same tenure) — most banks let you choose. Reducing tenure typically saves more total interest, since you cut the number of high-interest early payments.
EMI and Credit Score
Missing an EMI payment is reported to credit bureaus (CIBIL in India) and can significantly lower your score, making future loans more expensive or harder to get approved. Setting up auto-debit from your salary account is the most common way lenders recommend avoiding missed EMIs.