Ever wondered how your bank calculates your monthly EMI? We break down the standard formula and show you how to audit your loan interest with precision.
Equated Monthly Installment (EMI) is the lifeblood of modern consumerism. Whether it's a home, a car, or a smartphone, understanding how your EMI is calculated can save you from hidden costs.
Most modern loans use the reducing balance method. Unlike flat-rate interest, here interest is calculated on the remaining principal every month.
EMI = [P × r × (1 + r)^n] / [(1 + r)^n - 1]
Where:
In the early stages of a loan, the principal is high, so the interest component is large. As you pay off the principal, the interest reduces, and a larger portion of your EMI goes toward the principal.
The best way to reduce interest is to make 'Part-Payments' toward the principal. Even small amounts can shave years off your tenure and save lakhs in interest.
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