How EMI Works in India (2026 Guide)
January 15, 2025 • 6 min read
In India, the Equated Monthly Installment (EMI) is the most common way to repay loans. But did you know that not all EMIs are calculated the same way?
What is EMI?
EMI stands for Equated Monthly Installment. It is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly installments are used to pay off both interest and principal each month so that over a specified number of years, the loan is paid off in full.
The Two Calculation Methods in India
Banks and NBFCs in India primarily use the Reducing Balance Method, but some car dealerships and consumer durable loan providers might quote a Flat Rate. It is crucial to know the difference.
1. Reducing Balance Method
This is the standard and fair method used for home loans and personal loans by major banks like SBI, HDFC, and ICICI. Interest is calculated on the outstanding principal at the end of each month. As you pay off the principal, the interest component decreases.
2. Flat Rate Method
Interest is calculated on the full principal amount for the entire tenure. This makes the effective interest rate almost double the quoted rate! Always check if your loan is reducing balance or flat rate.
Check Your Loan Method
Use our advanced EMI calculator to see your amortization schedule and total interest outgo.
How to Reduce Your EMI Burden
- Prepay when possible: Even one extra EMI per year can reduce your tenure by years.
- Choose a shorter tenure: You pay higher monthly EMIs but save significantly on total interest.
- Balance Transfer: If your bank's rates are high, consider transferring your loan to a lender offering a lower rate.
Conclusion
Understanding the math behind your EMI puts you in control. Don't just look at the monthly outflow; look at the total cost of the loan. Use online calculators to verify bank or agent claims before signing any documents.