EMI Calculator

EMI Calculator: Reducing vs Flat Interest, Prepayments & Amortization Explained

1) What is an EMI?

An Equated Monthly Installment (EMI) is the fixed payment you agree to make every month when you take a loan. Each payment has two parts: interest (the cost of borrowing) and principal (the amount that reduces your outstanding balance). In most real‑world loans—home, auto, personal—the EMI is calculated so that the total number of payments is fixed, and the loan reaches a zero balance exactly on the last month.

In the early months, the outstanding balance is high, so the interest component is larger. As the balance shrinks, less of your EMI goes to interest and more goes to principal. This “see‑saw” behavior is the hallmark of a reducing‑balance loan.

2) Reducing‑balance vs flat interest

Reducing‑balance (a.k.a. “diminishing balance”) is the method most lenders use. Interest is charged on the current outstanding balance after each payment. Because the balance goes down every month, you pay less interest over time. Your EMI remains the same (except for a tiny adjustment in the final month due to rounding), but the mix of interest and principal changes.

By contrast, flat interest uses the original principal to compute interest for the entire term. Suppose you borrow ₹500,000 at 10% for 5 years. Under a flat method, you pay 10% of ₹500,000 each year for 5 years—irrespective of how much principal you’ve already repaid. The monthly payment is simply the total cost divided by the number of months. Flat loans often look cheaper in marketing brochures because their “rate” is quoted differently. But the total interest is usually higher than in a reducing‑balance loan with the same headline rate.

3) The EMI formula (with intuition)

The closed‑form formula for a reducing‑balance EMI is:

EMI = P · r · (1 + r)^n / ((1 + r)^n − 1)

Here, P is the principal, r is the monthly rate (annual rate divided by 12), and n is the number of months. The idea is that the present value of all future EMIs should equal the amount you borrow today. If the interest rate is zero, the formula collapses to the simple case: EMI = P / n.

Rounding and the last EMI. Lenders round payments to the nearest currency unit, which can leave a small residual that gets cleaned up in the last month. This calculator models that by adjusting the final row if required.

4) Prepayments: shorten tenure or cut EMI?

When you make an extra payment, you can either keep your EMI fixed and finish earlier (tenure reduction), or keep the tenure the same and reduce your EMI. Many lenders default to the first option unless you request the second. Prepaying earlier in the loan has the biggest impact because you avoid interest on the prepaid amount for all remaining months.

• Extra monthly prepayment: Add a fixed amount to every month’s principal. This steadily eats into the balance and can shave years off long loans.
• One‑time lump‑sum: Pay a larger amount in a specific month (e.g., after a bonus). The calculator lets you choose the month number starting at 1.
• Fees and rules: Some lenders charge a prepayment penalty or limit how often/how much you can prepay. Always check the fine print.

5) Amortization schedules, decoded

An amortization schedule is a month‑by‑month table showing how your loan evolves. For each row you’ll see date (if a start date is provided), EMI, the portion that went to interest, the portion that went to principal, any extra payment, and the remaining balance after the payment. This calculator exports the schedule as a CSV you can open in Excel or Google Sheets to audit the math or run what‑if scenarios.

Tip: If you care about cash‑flow timing, enter a start date. If the start date is Jan 31, the calculator snaps later dates to the last valid day in shorter months (e.g., 28/29 Feb).

6) Common pitfalls & lender quirks

• Comparing apples to apples: A “10% flat” loan is not comparable to “10% reducing.” Always compare total interest paid or the effective annual rate.
• Rounding: Minor differences (a few currency units) are normal due to rounding rules. Lenders may round every month; this tool rounds to two decimals and adjusts the last row.
• Rate changes: Floating‑rate loans can change rate over time. This simple calculator assumes a constant rate. To model a change, re‑run from a later balance.
• Fees not modeled: Processing fees, insurance, taxes, and penalties are not included here.

7) How to use this calculator (step‑by‑step)

1. Select the method: Reducing Balance (recommended) or Flat Interest.
2. Enter loan amount, rate, and tenure (months or years). Optionally set a start date to get real payment dates.
3. Add prepayments: a fixed extra monthly amount and/or a one‑time lump sum with the target month number.
4. Click Calculate. The EMI and totals appear at the top; scroll to see the full schedule.
5. Use Download Schedule (.csv) to export rows for your records; Print / Save PDF to create a PDF; and Copy Share Link to save the scenario.

8) FAQs