What is an EMI (equated monthly instalment)?
A fixed monthly payment covering both interest and principal.
A single repayment amount that stays the same every month while its composition changes: early instalments are mostly interest, later ones mostly principal. The amount is level; what it is buying is not.
How is EMI calculated?
From three inputs — the principal, the monthly rate, and the number of months — solved so that the last instalment lands exactly on zero. Each month, interest is charged on the balance still outstanding and whatever is left of the instalment reduces that balance, which is why the split shifts as the loan ages.
EMI: a worked example
₹5,00,000 at 18% over 24 months gives an instalment near ₹24,970. In month one roughly ₹7,500 of that is interest; by month twenty-four almost all of it is principal. A borrower who prepays in year one is therefore prepaying a balance that has barely moved — which is exactly why part-payment early is worth so much more to them than late.
Why does EMI matter?
Because “EMI” is treated as though it were the only repayment shape, and it is not. A gold loan is often interest-only with the principal falling due at maturity; a construction loan may step up; a seasonal borrower may need a structured schedule. A system that models only level EMIs quietly forces every product into one shape.
What a lending system has to do about EMI
Seven repayment shapes are supported, not one: level EMI, bullet, structured, interest-only, step-up, and instalments either calculated by the system or set by the lender. The shape is a property of the scheme, so a new product is configuration rather than a release. Rounding is carried into the last instalment, so the principal components add up to the sanctioned amount exactly rather than nearly.
Related terms
- APR (annual percentage rate) — The all-in cost of a loan, expressed as a yearly rate.
- Interest accrual — Interest earned as time passes, whether or not it has been collected.
- Moratorium — A period where repayment is deferred.
- Prepayment — Paying off part of a loan early, without closing it.
From the people who wrote this
Run your lending on Lenviq
The section above describes what a lending system has to do about this term. Lenviq does it — on every account, computed at day-end, with the direction it comes from recorded against it.
Lenviq is loan origination, servicing and accounting for NBFCs, built by FastLegal Technologies.