Interest is calculated on the reducing balance, the method every scheduled bank in India uses for retail loans. Processing fees, insurance and stamp duty are charged separately and are not part of the EMI.
Every retail loan in India — home, car, personal, consumer durable — is priced on the reducing balance method: interest each month is charged on what is still outstanding, not on the original amount. The instalment itself is fixed by this formula:
Where P is the principal, i is the monthly interest rate (the annual rate ÷ 12 ÷ 100) and n is the tenure in months.
Example: a ₹25,00,000 home loan at 8.75% for 20 years gives i = 0.0072917 and n = 240:
That last line is the one worth sitting with: over a long tenure the interest can approach the amount borrowed. It is also why the yearly breakdown matters — in year one of that loan, only about ₹4,000 of each ₹22,093 instalment reduces the principal. The other ₹18,000 is interest.
| Change | Effect on the monthly EMI | Effect on total interest |
|---|---|---|
| Longer tenure | Falls | Rises sharply — more months of interest on a slower-falling balance |
| Shorter tenure | Rises | Falls sharply |
| Rate up by 0.5% | Rises modestly | Rises — on a 20-year loan, by roughly one extra year's EMI |
| Larger down payment | Falls proportionally | Falls proportionally |
| Part-prepayment | Unchanged, unless you ask the bank to reduce it | Falls — the tenure shortens instead |
Rates depend on your credit score, income profile, lender and the loan-to-value ratio, and they move whenever the repo rate does. The bands below are broad market context for setting the slider, not quotes — check the current rate with the lender.
| Loan type | Usual tenure | Security |
|---|---|---|
| Home loan | 10 – 30 years | Secured against the property |
| Loan against property | 5 – 15 years | Secured against property |
| Car loan | 3 – 7 years | Secured against the vehicle |
| Two-wheeler loan | 1 – 4 years | Secured against the vehicle |
| Personal loan | 1 – 5 years | Unsecured — the highest rates |
| Gold loan | 6 months – 3 years | Secured against pledged gold |
Most home loans are now linked to an external benchmark, usually the RBI repo rate. When the benchmark moves, lenders overwhelmingly keep the EMI the same and change the tenure instead — a rate rise quietly adds months to your loan rather than rupees to your instalment. Ask your lender for the revised amortisation schedule after any reset; if the tenure would run past your retirement, they will raise the EMI instead.
The EMI is the loan only. Budget separately for the processing fee (usually 0.25%–1% of the amount), legal and technical valuation charges, stamp duty and registration on a property purchase, and any insurance the lender bundles. Tax deductions available on home loan interest and principal are also outside this calculation.
EMI = P × i × (1+i)^n ÷ [(1+i)^n − 1], where P is the principal, i is the monthly interest rate (annual rate ÷ 12 ÷ 100) and n is the tenure in months. Interest each month is charged on the outstanding balance, so the interest portion of the instalment falls over time while the principal portion rises.
It makes the monthly instalment smaller and the loan more expensive overall. Stretching a ₹25 lakh loan at 8.75% from 15 years to 25 years cuts the EMI by about ₹4,400 a month (₹24,986 to ₹20,554) but raises total interest from ₹19.98 lakh to ₹36.66 lakh, because the balance falls more slowly and is charged interest for ten extra years.
Interest is charged on the outstanding balance, which is at its highest at the start. On a 20-year home loan at 8.75%, about 82% of what you pay in the first year is interest. The split crosses over past the middle of the tenure, after which the principal portion dominates.
Reducing the tenure saves substantially more interest, because you are removing months of interest charges entirely rather than thinning each one. Reducing the EMI only helps if your monthly cash flow is under strain. Banks default to whichever you ask for, so state it explicitly.
Not on floating-rate term loans to individual borrowers — the RBI prohibits foreclosure charges on those. Fixed-rate loans and loans to non-individuals can still carry prepayment penalties, so check the sanction letter.
On a repo-linked floating-rate loan, lenders usually hold the EMI constant and adjust the tenure instead. A rate rise therefore extends your loan rather than increasing your monthly outgo, unless the extended tenure would breach the lender's limits, in which case the EMI is raised.