Formula
interest for the month = balance × (annual rate ÷ 12)principal repaid = payment − interestnew balance = balance − principal repaid
- The payment is the level EMI (plus any extra you add).
Each month interest is charged on what's still owed; whatever is left of the payment reduces the balance.
Worked example
5,00,000 at 10.5% for 5 years
- Loan amount
- 500,000
- Interest rate per year
- 10.5 %
- Loan tenure
- 5
- Tenure in
- Years
- Currency symbol
- ₹ Rupee (INR)
Total interest
₹1,44,816.99
Monthly instalment: ₹10,746.95
Total paid: ₹6,44,816.99
Months to pay off: 60
How it works
On a 5,00,000 loan at 10.5% for 5 years the first payment is about 4,375 of interest and 6,372 of principal; by the last payment nearly all of it is principal. Total interest comes to 1,44,816.99 because the final payment clears the exact remaining balance (10,746.94 instead of 10,746.95).
Add an extra monthly payment and the balance falls faster, so each month's interest is smaller. On 10,00,000 at 8.5% over 20 years, paying 5,000 extra each month finishes the loan in 104 months instead of 240 and saves about 6,69,000 of interest. Amounts are tracked in whole cents or paise so the balance ends at exactly zero.
For the headline instalment alone see the EMI Calculator. If you know the payment but not the rate use Loan Interest Rate Calculator.
Assumptions and limits
- Equal monthly payments on a reducing balance, no prepayment penalty, rate fixed for the whole term.