EMIs are Equated Monthly Instalments that form a part of repayment of the loan that you have availed. EMI consists of two components: the principal and the interest. The principal is paid against the loan amount that you have availed. And the interest is paid to the lender as a cost of providing the loan. This interest is either charged on the full amount for all EMIs or on reduced or outstanding principal amount left to be paid.

Flat Rate Interest Method:

Under the flat rate method, interest is always levied on the total loan amount regardless of the principal amount that you have already paid back.

For example, suppose in order to buy a car, Rohan avails a loan of INR 2 lakhs with an interest rate of 12% to be paid back in 2 years. Under the flat rate method, Rohan will always pay the interest on the total loan amount of INR 2 lakhs.

The formula to calculate EMI using flat rate method would be:

EMI = (Principal + Interest)/Period in Months

So, in the example above, the calculation would be:

EMI = (200000 + 48000)/24 = INR 10,333.33

Reducing Balance Interest Method:

Under the reducing EMI calculator, interest is always levied on the remaining or the outstanding balance of the loan amount after having repaid certain amount of principal every month. The EMIs in this case remain the same, however, the interest component in the EMI keeps reducing every month.

The formula to calculate EMI using reducing balance method would be:

EMI = [P x R x (1+R)^N]/[{(1+R)^N}-1]

Here P is the Principal Loan Amount, R is the monthly rate of interest, and N is the loan duration in months.

So, for the above example, the calculation would be:

EMI = [200000 x 12/(100 * 12) x (1.01)^24] / [{{1.01)^24}-1]

       = 2000 x 1.2697 / 0.2697

       = 9415.65

You can note that EMIs under reducing balance method are generally lower than that in the flat rate interest method. The interest component in the reducing balance method would also keep reducing every month, thereby saving costs on the loan for you. Personal loan EMI calculators generally use the reducing balance method whereas car loan EMI calculators generally use the flat rate interest method.

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These are simple methods to calculate EMI yourself. You can also explore more methods for EMI calculator in excel as well as explore the online EMI calculators for added ease and convenience. While opting for loans is generally a tedious and time-consuming process, PaySense makes it hassle-free for you. You can apply for loans of up to INR 2 Lakhs within a few minutes and the funds get disbursed in to your account within a matter of hours.