How to Calculate Loan EMI: Simple and Compound Interest with Formulas

In today’s financial world, taking a loan has become very common. Whether it is for education, home, business, or personal needs, most people depend on loans. But before applying for any loan, it is very important to understand how much you will pay every month. This monthly payment is called EMI. In this article, you will learn how to calculate Loan EMI using simple and compound interest methods with easy formulas and real-life examples.

What is EMI?

EMI stands for Equated Monthly Installment. It is the fixed amount that a borrower pays every month to the lender until the loan is fully repaid. EMI includes two parts:

• Principal Amount (Original Loan)
• Interest Amount (Bank’s Profit)

Each EMI payment reduces your loan balance and covers interest for that month.

Why is EMI Calculation Important?

Knowing your EMI before taking a loan helps you in many ways:

• You can plan your monthly budget properly.
• You avoid financial stress.
• You can compare different loan offers.
• You can choose the right loan tenure.

Now, let us understand EMI calculation using simple and compound interest methods.

Part 1: EMI Calculation Using Simple Interest

Simple interest is calculated only on the principal amount. Some small lenders and educational examples use this method.

Simple Interest Formula

SI = (P × R × T) / 100

Where:

• P = Principal Amount
• R = Rate of Interest per year
• T = Time in Years

Total Amount Formula

Total Amount = Principal + Simple Interest

EMI Formula (Simple Interest)

EMI = Total Amount / Total Months

Example of Simple Interest EMI

Let us understand with an example:

• Loan Amount = ₹60,000
• Interest Rate = 8% per year
• Time = 3 years

Step 1: Calculate Simple Interest

SI = (60000 × 8 × 3) / 100 = ₹14,400

Step 2: Calculate Total Amount

Total = 60000 + 14400 = ₹74,400

Step 3: Calculate EMI

Total Months = 3 × 12 = 36

EMI = 74400 / 36 = ₹2,067

So, monthly EMI will be approximately ₹2,067.

Limitations of Simple Interest EMI

Although simple interest is easy to calculate, it is rarely used by banks. It does not reduce interest on decreasing balance. Therefore, most banks prefer compound interest.

Part 2: EMI Calculation Using Compound Interest (Bank Method)

Most banks and financial institutions use compound interest for EMI calculation. In this method, interest is calculated on the remaining loan balance.

Standard EMI Formula

EMI = [P × R × (1 + R)^N] / [(1 + R)^N − 1]

Where:

• P = Principal Amount
• R = Monthly Interest Rate
• N = Total Number of Months

How to Find Monthly Interest Rate?

Monthly Rate = Annual Rate / (12 × 100)

For example, if annual rate is 12%:

R = 12 / (12 × 100) = 0.01

Example of Compound EMI

Consider the following example:

• Loan Amount = ₹2,00,000
• Interest Rate = 10% per year
• Tenure = 5 years

Step 1: Calculate Monthly Rate

R = 10 / (12 × 100) = 0.0083

Step 2: Calculate Total Months

N = 5 × 12 = 60

Step 3: Apply Formula

EMI ≈ [200000 × 0.0083 × (1.0083)⁶⁰] / [(1.0083)⁶⁰ − 1]

EMI ≈ ₹4,248

Total Payment = 4248 × 60 = ₹2,54,880

Total Interest = ₹54,880

What is an EMI Amortization Schedule?

An amortization schedule shows how each EMI is divided into principal and interest. In the early months, interest is high and principal is low. Gradually, principal increases and interest decreases.

This helps borrowers understand how their loan reduces over time.

Simple vs Compound EMI Comparison

Feature	Simple Interest	Compound Interest
Calculation	Fixed	Reducing Balance
Used By	Rarely	Banks and NBFCs
Accuracy	Low	High
Cost	Lower	Higher

How to Calculate EMI Using Excel?

You can calculate EMI easily using Excel with the PMT function.

Formula:

=PMT(Rate/12, N, Loan Amount)

Example:

=PMT(10%/12, 60, 200000)

This will directly give your EMI.

Tips to Reduce Your EMI

• Choose longer tenure.
• Make higher down payment.
• Pay prepayment when possible.
• Compare interest rates.
• Maintain good credit score.

Online EMI Calculators

You can also calculate EMI using online tools:

• Google EMI Calculator
• Bank Websites
• Groww, PaisaBazaar, PolicyBazaar

Common Mistakes While Taking Loans

• Ignoring processing fees
• Not checking hidden charges
• Choosing very short tenure
• Not reading terms carefully
• Borrowing more than needed

Conclusion

Understanding how to calculate Loan EMI is essential for smart financial planning. Simple interest method is easy but rarely used in real life. Compound interest EMI is the standard method followed by banks. Before taking any loan, always calculate your EMI, check total interest, and choose a suitable tenure. This habit will help you stay financially stable and stress-free.

If you are a student, teacher, or working professional, learning EMI calculation will improve your financial awareness and decision-making skills.

Author: BK Pawar