What is an EMI?

EMI (Equated Monthly Installment) is the amount payable to the lending agencies every month, till the loan is paid back in full. It consists of a portion of the interest as well as the principal.

EMI is calculated using the following formula

EMI Formula: l x r [(1+r)n /(1+r)n-1 ] x 1/12
l = loan amount
r = rate of interest
n = term of the loan

EMI is called "equated", because it is loan amount plus total interest divided by loan tenure. However, as you keep paying EMI, some portion of EMI goes as interest but some portion goes as principal repayment. So if you pay an EMI of Rs1000 for a house loan, not the entire Rs 1000 would go as interest payment, but some portion goes as principal repayment, which essentially reduces the principal on which further interest is calculated. It is extremely important to understand what goes for interest and what goes for principal repayment.