Finance Guide
How Loan EMIs are Calculated (Formula & Guide)
Published: July 24, 2026•5 min read
When taking a loan (whether a home loan, car loan, or personal loan), one of the most important concepts to understand is the **Equated Monthly Installment (EMI)**. An EMI is a fixed payment made by a borrower to a lender on a specified date each calendar month.
The Mathematical EMI Formula
The standard mathematical formula used to calculate EMIs on a reducing balance basis is:
EMI = [P x r x (1 + r)^n] / [(1 + r)^n - 1]
Where:
- P: Principal loan amount (the base borrowing sum).
- r: Monthly interest rate (Annual Rate / 12 / 100).
- n: Loan tenure in number of monthly installments.
Worked Example
Suppose you take a car loan of $20,000 at an annual interest rate of 12% for a tenure of 3 years (36 months).
- Monthly rate (r) = 12 / 12 / 100 = 0.01
- Tenure (n) = 36 months
- EMI = [20,000 x 0.01 x (1.01)^36] / [(1.01)^36 - 1] = $664.29 per month.
Try it yourself!
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