How is EMI Calculated? EMI (Equated Monthly Installment) is the fixed monthly payment a borrower makes to repay a loan over a specified period. It includes both the principal and the interest components. Factors involved in EMI calculation: 1. Principal (P): The total loan amount borrowed. 2. Interest Rate (R): The annual interest rate charged by the lender, converted into a monthly rate. 3. Loan Tenure (N): The total duration of loan repayment in months. EMI Formula: EMI = \[P × R × (1 + R)^N] / \[(1 + R)^N – 1] Where: P = Principal loan amount R = Monthly interest rate (Annual interest rate ÷ 12 ÷ 100) N = Number of monthly installments (loan tenure in months) Explanation: The formula uses compound interest on the reducing balance. Initially, the interest component of EMI is higher and decreases over time. The principal component increases with each payment. Example: If you take a loan of ₹5,00,000 at an annual interest rate of 12%, to be repaid over 5 years (60 months): Monthly interest rate, R = 12 ÷ 12 ÷ 100 = 0.01 Loan tenure, N = 60 months Principal, P = ₹5,00,000 Using the formula, you can calculate your monthly EMI. Importance of EMI: Helps borrowers plan monthly budgets with fixed payments. Lenders assess loan affordability. Enables comparison of loans with different interest rates and tenures.