EMI (Equated Monthly Instalment) is the fixed amount you pay every month — part of it repays the principal, and part covers interest.
The formula banks use
EMI = P × r × (1+r)^n ÷ ((1+r)^n − 1)
where P is the loan amount, r is the monthly interest rate (annual rate ÷ 12 ÷ 100), and n is the number of months.
Reducing balance: why early EMIs feel 'wasted'
Interest is charged only on the outstanding balance. In the first year, most of your EMI goes to interest; by the last year, almost all of it repays principal. This is why prepaying early in the tenure saves the most.
Example
On a Rs 5,00,000 loan at 11% for 5 years, the EMI is about Rs 10,871. You pay roughly Rs 1.52 lakh as total interest. Prepay Rs 50,000 in year one and you can save Rs 25,000+ in interest and close the loan months earlier.
Tips
- Choose the shortest tenure your budget allows — longer tenure means smaller EMI but much more total interest.
- Use SetuMoney's EMI calculator to compare scenarios before you sign.
- Check if your lender charges prepayment penalties (many personal loans do for the first 12 months).