How do extra prepayments reduce total loan cost?

Prepayments directly reduce the loan principal balance. Since subsequent interest is computed strictly on the remaining principal, prepayments dramatically lower both total interest paid and effective tenure.

What is the difference between flat interest rate and reducing balance EMI?

A flat interest rate computes interest on the original principal for the entire duration, resulting in an effective interest rate nearly double the stated rate. Almost all regulated banks use the reducing balance method.

How Loan EMI is Calculated: Formula & Amortization | AnyCalcHub

1. The Standard Reducing Balance EMI Formula

An Equated Monthly Installment (EMI) is a fixed payment amount made by a borrower to a 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.

Mathematical Formula

EMI = P × r × (1 + r)^n / ((1 + r)^n - 1)

Step-by-Step Worked Example

Principal (P)₹1,000,000

Annual Rate (R)8.5%

Tenure (N)5 Years (60 Months)

Step 1:Convert annual interest to monthly decimal: r = 8.5 / (12 × 100) = 0.0070833

Step 2:Compute (1 + r)^n: (1.0070833)^60 = 1.5273

Step 3:Compute numerator: 1,000,000 × 0.0070833 × 1.5273 = 10,818.8

Step 4:Compute denominator: 1.5273 - 1 = 0.5273

Step 5:Divide: 10,818.8 ÷ 0.5273 = ₹20,517

Final Result: Monthly EMI is ₹20,517

2. Principal vs Interest Amortization Dynamics

In the early months of a loan, the outstanding principal balance is highest, meaning the majority of your EMI goes toward paying interest. Over time, as the principal balance declines, the interest component decreases, and the principal component increases rapidly.

Mathematical Formula

Monthly Interest = Outstanding Principal × r; Monthly Principal Repaid = EMI - Monthly Interest

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How Loan EMI is Calculated: The Mathematical Formula & Amortization Schedule Explained

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1. The Standard Reducing Balance EMI Formula

2. Principal vs Interest Amortization Dynamics

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Frequently Asked Questions

How do extra prepayments reduce total loan cost?

What is the difference between flat interest rate and reducing balance EMI?

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