EMI (equated monthly instalment) is worked out with the formula 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. For a Rs 2,000,000 loan at an example rate of 15% for 5 years, the EMI comes to about Rs 47,580.
The formula, step by step
Take the worked example: P = Rs 2,000,000, annual rate 15% (an example, not a quote from any bank), term 5 years.
- Monthly rate: r = 15 ÷ 12 ÷ 100 = 0.0125.
- Number of months: n = 5 × 12 = 60.
- Growth factor: (1 + r)n = 1.012560 = 2.107.
- EMI: 2,000,000 × 0.0125 × 2.107 ÷ (2.107 − 1) = Rs 47,580.
Over 60 months you pay Rs 2,854,792 in total, of which Rs 854,792 is interest. That’s 43% of the amount borrowed.
Where each payment goes
The EMI stays the same, but its make-up changes. Interest is charged only on the balance still owed, so early payments are mostly interest and later ones mostly principal. Here are the first six months:
| Month | EMI | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | 47,580 | 25,000 | 22,580 | 1,977,420 |
| 2 | 47,580 | 24,718 | 22,862 | 1,954,558 |
| 3 | 47,580 | 24,432 | 23,148 | 1,931,410 |
| 4 | 47,580 | 24,143 | 23,437 | 1,907,973 |
| 5 | 47,580 | 23,850 | 23,730 | 1,884,243 |
| 6 | 47,580 | 23,553 | 24,027 | 1,860,216 |
Month 1 interest is simply the balance × r: 2,000,000 × 0.0125 = Rs 25,000. The rest of the EMI reduces the loan. Each month the balance is a little lower, so the interest share falls and the principal share grows.
How the term changes the cost
A longer term lowers the EMI but raises total interest. Same Rs 2,000,000 at an example 15%:
| Years | EMI (Rs) | Total interest (Rs) |
|---|---|---|
| 1 | 180,517 | 166,199 |
| 3 | 69,331 | 495,904 |
| 5 | 47,580 | 854,792 |
| 7 | 38,594 | 1,241,855 |
| 10 | 32,267 | 1,872,039 |
Stretching from 5 to 10 years cuts the instalment but more than doubles the interest. If you can afford a higher EMI, a shorter term saves a lot.
What happens when a floating rate changes
On a floating-rate loan the bank resets the rate periodically and recalculates the EMI on the remaining balance and months. Using the same example, after 12 payments the balance is about Rs 1,709,615. If the rate then moved to an example 17% for the remaining 48 months, the new EMI would be about Rs 49,331, and if it fell to 13% it would be about Rs 45,865. Some lenders keep the EMI the same and change the term instead, so ask how your loan handles it.
Flat rate vs reducing rate
Some car dealers, leasing schemes and informal lenders quote a flat rate. With a flat rate, interest is charged on the full original amount for the whole term, even as you repay it. At 15% flat for 5 years, interest is 2,000,000 × 15% × 5 = Rs 1,500,000, and the monthly payment is (2,000,000 + 1,500,000) ÷ 60 = Rs 58,333.
That is Rs 10,753 a month more than the reducing-rate EMI. Worked backwards, a 15% flat rate here is the same as a reducing rate of about 24.7%. Banks in Pakistan generally quote reducing-balance rates, often a floating rate linked to KIBOR plus a margin, but always ask which kind a quote is.
Ways to pay less interest
- Borrow less, with a bigger down payment.
- Choose the shortest term you can comfortably afford.
- Make part-prepayments when allowed; they cut the balance and every future interest charge. Check any prepayment fee first.
- Compare offers by total cost and effective rate, not just the monthly instalment.
Try your own numbers on the EMI calculator, which shows the full amortisation schedule. The percentage calculator helps compare rates, and our guide to calculating percentages explains the basics. To see when your last instalment falls, use the months from today tools.
Frequently asked questions
What is the formula for EMI?
EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where P is the loan, r the monthly rate (annual ÷ 12 ÷ 100) and n the number of months.
What is the EMI for Rs 20 lakh for 5 years?
At an example rate of 15% a year, it is about Rs 47,580 a month. A different rate gives a different EMI; enter yours in the EMI calculator.
Is a flat rate cheaper than a reducing rate?
No. The same headline figure as a flat rate costs much more, because interest is charged on the original amount throughout. A 15% flat rate over 5 years works out to roughly a 25% reducing rate.
Why is most of my early EMI interest?
Interest is charged on the outstanding balance, which is largest at the start. As you repay, the interest part shrinks and the principal part grows.