Part of the guide: Money basics for everyday finances: budgeting, emergency funds, loans, insurance and tax terms
Personal financeHow an EMI works: why early instalments are mostly interest
What an EMI is made of, why interest takes the larger share early in a loan, and how tenure and rate change the total interest, with a worked example.
An EMI (equated monthly instalment) is a fixed amount you pay every month on a loan. It looks like one number, but each payment is made of two parts.
What is inside an EMI
- Interest: the cost of borrowing, charged on the balance you still owe.
- Principal: the part that reduces the amount you owe.
The EMI stays the same; the split between the two changes every month.
Why early payments are mostly interest
Interest each month is calculated on the outstanding balance. At the start the balance is the full loan, so interest is large. As you repay principal, the balance shrinks, so interest each month falls and more of the same EMI goes to principal.
A worked example (illustrative)
A loan of ₹25 lakh at 9% a year for 20 years has an EMI of about ₹22,493.
| First month | Last month | |
|---|---|---|
| Interest | about ₹18,750 | about ₹167 |
| Principal | about ₹3,743 | about ₹22,326 |
Over the whole loan you pay about ₹54 lakh: ₹25 lakh of principal and about ₹29 lakh of interest. Try your own numbers in the EMI calculator.
What changes the total
- Longer tenure: a smaller EMI but a lot more interest in total.
- Higher rate: a larger EMI and more interest.
- Prepayment: paying extra early reduces the balance, so interest falls. Check your lender’s terms and any charges.
- Floating rates: if the lender changes the rate, the EMI or the tenure changes.
The point about tenure
The true price of a loan shows how a 25-year loan can cost more in interest than the amount borrowed. It is arithmetic, not a view on whether to borrow.
For the wider set of everyday money terms, see the money basics guide.