What is EMI and How is it Calculated?

Imagine standing at the showroom, eyeing the latest scooter or a brand-new car. The excitement is real, but so is the hefty price tag. Paying the full amount upfront feels overwhelming, but there's a solution that bridges the gap between desire and affordability—Equated Monthly Instalments (EMIs). This financial tool has empowered millions of Indians to own their dream vehicles, homes, and gadgets without straining their savings.

According to the Reserve Bank of India (RBI), household credit in India surged by 17% year-on-year in 2024, driven largely by consumer loans for vehicles, homes, and personal needs. With rising aspirations and easy access to credit, EMIs have become an essential part of everyday financial planning.

What is EMI Full Form and Meaning?

EMI stands for Equated Monthly Instalment. Let’s say you have taken a home loan of ₹10 lakh for a tenure of 10 years. You have to repay the amount to the bank in EMIs, meaning every month a fixed amount would be deducted from your linked bank account until the loan is fully repaid. Each EMI consists of two components:

• Principal Amount: The original loan amount.
• Interest Amount: The cost charged by the lender for borrowing the money.

Over the loan tenure, the interest portion decreases while the principal repayment increases. This structure is known as the reducing balance method, which is widely used for most loans in India. EMIs offer a predictable repayment structure, helping you manage large expenses—such as buying a home, bike, card, or even funding education—without depleting your savings.

How is Loan EMI Calculated?

EMI is calculated based on the loan amount, interest rate, and tenure. Adjusting these parameters would either reduce or increase your loan EMI. Please note that the loan processing fee is not a part of your EMI.

Banks and financial institutions calculate interest on loans using three common methods: daily reducing balance, monthly reducing balance, and annual reducing balance. Each method impacts how quickly the loan principal reduces, influencing the total interest paid over the loan tenure.

1. Daily Reducing Balance Method (Most Efficient for Borrowers)

In the daily reducing balance method, the outstanding loan principal decreases daily as you make payments. Interest is calculated on the remaining principal every day, making this method highly borrower-friendly, especially for large loans like home loans.

How It Works:

• When you pay your EMI, the principal reduces immediately.
• Any partial prepayments made during the month instantly lower the outstanding principal, leading to lower interest charges for the remaining loan.

Example:

• If your EMI is due on the 5th of every month and you make a prepayment on the 10th, the principal reduces on the 10th itself.
• As a result, from the 10th onward, interest is charged on the lower principal, saving you money.

This method is widely used by banks for home loans and large personal loans, as it minimizes the overall interest burden.

2. Monthly Reducing Balance Method

In the monthly reducing balance method, the principal is reduced once a month, after the EMI is paid.

Example:

• If you make a prepayment on the 10th, it won’t reflect until the next EMI date (e.g., the 5th of the following month).
• This delay results in slightly higher interest payments compared to the daily reducing method.

Housing finance companies often use this method, but it is less efficient than the daily reducing balance method.

3. Annual Reducing Balance Method

In the annual reducing balance method, the principal reduces only once a year, after EMI payments for the entire year.

This outdated method results in significantly higher interest payments and is rarely used today.

What is Loan Amortization Schedule?

A loan amortization schedule details how each EMI is split between principal and interest, along with the outstanding principal after every payment. It helps you track your repayment progress over the loan tenure.

Loan EMI Calculation Formula

The formula to calculate EMI is: EMI=(1+R)N−1P×R×(1+R)N

Where:

• P = Loan principal
• R = Monthly interest rate (annual rate/12)
• N = Total number of monthly instalments

For example, a ₹50 lakh loan at a 10% interest rate over 20 years results in an EMI of approximately ₹48,251.

This structured repayment helps borrowers manage large loans effectively while minimizing interest through methods like the daily reducing balance. However, manual calculations can be taxing and may leave room for errors. As a better alternative, use our Home Loan EMI Calculator. Ujjivan’s EMI Calculator is extremely easy to use. All you need to do is select the loan amount, tenure and applicable interest rate. The EMI Calculator would show your EMI amount. You can also separately check the principal and interest amount.

Can You Increase Your EMI After Taking a Loan?

You can increase your EMI or reduce the loan tenure by writing to the bank. You may require a few documents (generally forms) to submit, including your desired loan tenure or EMI amount. Increasing your EMI or lowering your loan tenure can help you reduce the interest component, lower the total cost of the loan and close your loan faster.

As you can see, though the EMI is higher, you would end up saving approximately ₹3 lakh on interest.

Disclaimer: The above example is for illustration purpose only. Ujjivan SFB does not take any responsibility for the accuracy of the information.

What are the Benefits of Increasing Your EMI?

1. Faster Loan Repayment

By increasing your EMI, you pay off a larger portion of the principal each month. This shortens your loan tenure, allowing you to become debt-free sooner.

2. Lower Interest Payment

A higher EMI reduces the outstanding principal faster, which means less interest is charged over the loan period. This can lead to significant savings.

3. Improved Credit Score

Consistently paying higher EMIs shows financial discipline and strengthens your creditworthiness. This can help you secure better loan offers in the future.

4. Flexibility with Prepayment

Instead of increasing EMIs, some borrowers prefer partial prepayments when they have extra funds. However, increasing your EMI is a disciplined, consistent approach to reducing your debt.\

What Happens if You Fail to Pay EMI?

1. Late Payment Penalty

When you miss a loan EMI, lenders usually impose a late payment fee. This penalty can be a fixed amount or a percentage of the EMI and varies across financial institutions. Repeated delays can lead to mounting penalties, significantly increasing your overall loan repayment burden. For example, if your EMI is ₹10,000 and the penalty is 2% per month, you'll pay ₹200 extra for every month of delay.

2. Impact on Credit Score

Your credit score, maintained by agencies like CIBIL, Experian, or Equifax, reflects your creditworthiness. Missing even one EMI can drop your credit score by 50–100 points, depending on your credit history. A lower credit score reduces your eligibility for future loans or credit cards and may lead to higher interest rates due to perceived risk.

3. Increased Interest Burden

In addition to penalties, interest continues to accrue on the unpaid EMI amount. Some banks might compound the unpaid interest, increasing the total outstanding balance. This can stretch the loan tenure and make it harder to clear the debt. Over time, the unpaid amount snowballs, making repayment more difficult.

4. Loan Default Tag

If EMIs remain unpaid for 90 days or more, lenders classify the loan as a Non-Performing Asset (NPA). This "loan default" tag is reported to credit bureaus, severely damaging your financial credibility. Defaulting may lead to the termination of the loan agreement and acceleration of the debt, meaning the lender can demand immediate repayment of the entire outstanding amount.

5. Legal Action

In the case of secured loans like home loans, car loans, or gold loans, lenders have the legal right to seize the pledged collateral after due notice. Under the SARFAESI Act (2002), banks can auction the property without court intervention. For unsecured loans, lenders may file a lawsuit to recover the dues, leading to court proceedings and additional legal costs.

6. Difficulty in Availing Future Credit

A poor repayment record makes lenders hesitant to approve future loans or credit facilities. Even if approved, the loan may come with a higher interest rate, stricter terms, or a lower sanctioned amount. For example, if your credit score falls below 650, you may be disqualified from premium credit cards or personal loans.

How to Avoid EMI Defaults

• Opt for Loan Restructuring: If you're facing temporary financial challenges, request your lender for restructuring options like extending loan tenure, reducing EMI amounts, or opting for a moratorium period.
• Set Auto-Debit for EMIs: Linking your loan account with auto-debit ensures timely EMI payments. Always maintain sufficient funds to avoid overdraft charges.
• Maintain an Emergency Fund: A fund covering at least 3–6 months' worth of EMIs can prevent defaults during income disruptions.
• Communicate with Your Lender: Inform your lender early about financial hardships. Proactive communication may lead to flexible solutions, such as partial payments or EMI breaks.

Types of Loans with EMI Facility

1. Home Loans: Home loans are secured loans where you can avail a loan amount based on your loan eligibility to purchase or construct a house. The loan is taken for a pre-defined tenure, generally up to 20 years. The repayment is done via EMIs, where money is deducted from your linked account every month, on the EMI due date. You can check the different types of home loans here.

2. Two-Wheeler Loans: Like home loans, two-wheeler loans are also secured loans, where your bike or two-wheeler is pledged as collateral. The loan tenure is usually up to 4 months and the repayment is done via EMIs.

3. Group Loans: It’s a unique product launched by Ujjivan that enables a group of individuals categorised under the economically weaker section of the society and sharing a common goal avail a loan to fund their business. Such loans are unsecured loans, meaning you don’t have to pledge collateral. You can read more about group loans here. 

4. Individual Loans: Individual loans are similar to personal loans, however, these are purpose-driven loans, meaning you can avail the loan to fund a certain requirement – for example: home renovation, agricultural business expansion, etc.

5. Gold Loan: Gold loans are secured loans where you can avail a loan by pledging gold. You can use the loan amount to meet any expense – there are no end-use restrictions.

Can You Pay EMI with Cheque?

Yes, you can pay your loan EMIs using a cheque. You can write a cheque to the bank to process your EMI. This is a traditional method of payment and can be time consuming. Also, in case of a bounced cheque, there could be legal implications.