Planning a loan can feel complicated if you do not know how monthly payments are calculated. Most banks use a reducing balance interest model.
Understanding the EMI Formula
Equated Monthly Installment (EMI) is calculated using a standard formula:
EMI = [P x R x (1+R)^N] / [(1+R)^N - 1]
- P represents the principal loan amount.
- R represents the monthly interest rate (annual rate divided by 12).
- N is the loan tenure in months.
Why You Need an Amortization Schedule
An amortization schedule shows you how much of each payment goes toward paying off your principal versus paying interest. In the beginning, most of your payment goes to interest. Over time, more goes to the principal.