The formula, and what it hides
Take a ₹25 lakh loan at 8.5% for 20 years. The EMI comes out at ₹21,696 a month. Over 240 payments you hand the bank ₹52,06,939, which means ₹27,06,939 is interest. You borrowed ₹25 lakh and will repay about double.
The formula behind that number is EMI = P × r × (1+r)^n / ((1+r)^n − 1). P is the principal, r is the monthly rate (annual rate ÷ 12 ÷ 100) and n is the number of months. Here r = 0.085 / 12 = 0.0070833 and n = 240. The EMI is fixed, but what it is made of changes every month, and that is the part most people never look at.
Worked example: why the first years barely touch the loan
In month 1 the bank charges interest on the full ₹25,00,000: 25,00,000 × 0.0070833 = ₹17,708. The rest of your EMI, ₹3,987, reduces the loan. So 82% of your first payment is interest. Over the whole of year 1 you pay ₹2,60,347, of which ₹2,10,591 is interest and only ₹49,756 is principal. The balance after twelve months is ₹24,50,244.
It takes until month 143, nearly twelve years in, before a payment has more principal than interest. At the halfway mark of 10 years you have paid ₹26,03,470, half of everything you will ever pay, and still owe ₹17,49,846. You have cleared only 30% of the loan. That's how a reducing-balance loan works, not a trick by the lender.
The year-wise table above shows this clearly. Year 5 has ₹1,90,527 of interest, year 10 has ₹1,53,710, year 15 has ₹97,480 and year 20 has just ₹11,601. Switch to the month-wise table when you want to know your exact outstanding balance for a part-payment or a balance transfer.
What a small extra payment does
Put ₹5,000 extra into the loan every month and the same loan finishes in 155 months instead of 240. That is 85 months earlier, just over seven years. Total interest drops from ₹27,06,939 to ₹16,17,579, a saving of ₹10,89,361. You are paying 23% more each month and shortening the loan by 35%.
Smaller amounts still work. ₹2,000 extra a month saves 45 months and ₹5,88,725 of interest. Every rupee prepaid early stops earning interest for the remaining years, while one prepaid in year 15 saves far less.
My position: if your loan rate is above what you can safely earn on money you would otherwise save, and you already have an emergency fund of several months of expenses, prepaying is a sound choice. If you do not have that cushion, build it first. A prepaid loan cannot be un-prepaid when a medical bill arrives.
Mistakes people make with EMI numbers
- Comparing only the EMI. Stretching the same loan to 25 years lowers the EMI to ₹20,131 but raises total interest to ₹35,39,203, about ₹8.3 lakh more than the 20-year plan. A 15-year plan costs ₹24,618 a month and ₹19,31,328 in interest.
- Treating a 0.5% rate difference as small. At 9% the same loan has an EMI of ₹22,493 and interest of ₹28,98,356. That half a percent costs about ₹1.9 lakh over the term.
- Forgetting the fees. Processing fees and bundled insurance are not in the EMI formula. Ask for the Key Facts Statement and compare total cost.
- Assuming prepayment always costs money. Under the RBI's 2025 prepayment directions, regulated lenders cannot charge prepayment penalties on floating-rate loans to individuals for non-business purposes sanctioned or renewed on or after 1 January 2026. Fixed-rate loans can still carry a charge as per the contract, applied on the amount prepaid. Check the sanction letter.
- Expecting a floating-rate result to stay true. If the rate changes, the lender adjusts your EMI or tenure. Re-run with your current balance and remaining months.
Limits of this calculator
It assumes one fixed rate and a payment at the end of each month. Real lenders may count interest by day or add a pre-EMI period, so your bank's schedule can differ by a few rupees. It does not model moratoriums, step-up EMIs, part-disbursed loans, tax benefits, or lump-sum prepayments (only a steady monthly extra). To see how the same money might grow if invested instead, try the compound interest and SIP calculator. Loan-linked service fees carry GST too, which the GST calculator can split out.
Questions people ask
How is EMI calculated on a reducing balance?
Each month interest is charged on the amount still owed, and the rest of your fixed EMI repays principal. The formula gives the one fixed amount that brings the balance to exactly zero after the last payment.
Should I reduce my tenure or my EMI after a prepayment?
For most borrowers, keeping the EMI the same and shortening the tenure saves more interest. Lowering the EMI makes sense only if the monthly cash flow is tight. Ask the lender which option applies by default, because some reduce the EMI unless you instruct otherwise.
Does the calculator work for car and personal loans?
Yes, the maths is the same for any fixed-rate reducing-balance loan. Some car and personal loans are quoted as flat rates. A flat rate charges interest on the original amount for the whole term, so a 9% flat rate is much closer to 16-17% on a reducing balance. Convert it before you compare offers.
Why is my bank's EMI slightly different?
Banks may round differently or count days for the first instalment. A few rupees is normal. Hundreds usually means a different rate, tenure or added charges.