How EMI works (reducing balance)

EMI (Equated Monthly Instalment) is a fixed monthly payment on a reducing-balance loan. Each EMI covers interest on the outstanding balance plus some principal. The payment stays the same (if the rate is fixed); the interest share falls over time as the balance shrinks.

The standard formula

For principal P, monthly rate r (annual rate ÷ 12 ÷ 100) and n months:

EMI = P × r(1+r)ⁿ / ((1+r)ⁿ − 1)

This is the same amortising formula used for personal loans in the US, UK, Australia and Canada — only the label changes (“payment”, “repayment”, “instalment”).

Flat rate vs reducing balance

A flat-rate quote charges interest on the original principal for the whole term. It often looks lower than a reducing-balance rate but costs more. LoanCalc Lab models reducing balance only. If a lender quotes flat, ask for the reducing-balance equivalent or the APR / comparison rate.

What to check next

• Use the EMI calculator for payment, interest and total repayable
• Open the amortisation schedule to see the interest/principal split
• Run APR true cost if there is an arrangement or processing fee