Every bank advertises its loan interest rate prominently, but the number that actually determines whether you can afford a loan is the monthly EMI (Equated Monthly Installment), a single fixed payment that combines principal repayment and interest. Two loans with the identical advertised rate can still produce different EMIs if their tenure differs, which is exactly why understanding the formula behind the number matters more than comparing rates alone.
The formula, broken down
The standard formula for reducing-balance EMI is EMI = [P × R × (1+R)^N] ÷ [(1+R)^N − 1]. P is the principal, the amount you actually borrow. R is the monthly interest rate, found by taking the annual rate your bank quotes, dividing by 12, and dividing by 100 to convert from a percentage to a decimal. N is the total number of monthly payments, so a 20-year loan has N = 240.
Reducing balance means interest is charged only on the outstanding principal each month, not on the original loan amount for the whole tenure. That's why an early payment in a long loan is mostly interest, and a payment near the end is mostly principal, the outstanding balance (and therefore the interest portion) keeps shrinking every month.
A worked example
Take a ₹25,00,000 loan at 9% annual interest over 20 years. The monthly rate R = 9 ÷ 12 ÷ 100 = 0.0075. N = 240 months. Plugging into the formula gives an EMI of roughly ₹22,493 a month. Over 240 months that's about ₹53,98,320 total paid, against a principal of ₹25,00,000, meaning almost ₹28,98,320 is interest, more than the original loan amount.
That's the part the formula makes visible and a quick mental estimate hides: at a given rate, stretching the tenure lowers the EMI but sharply increases total interest paid, because the balance stays higher for longer and keeps accruing interest. You can plug in your own principal, rate and tenure on the EMI Calculator to see the exact breakdown, including a full month-by-month amortization schedule.
Why tenure matters more than people expect
Doubling a loan's tenure roughly halves the EMI, which is why longer tenures look attractive on a monthly-budget basis, but it doesn't roughly double total interest, it usually more than doubles it, since the outstanding balance stays elevated for far longer. Before choosing a longer tenure purely to lower the EMI, it's worth checking the total interest figure specifically, not just the monthly number, using the Loan Prepayment Calculator to see how even small extra payments early in the loan cut total interest disproportionately.
If you're deciding how large a loan you can responsibly take on in the first place, the Loan Affordability Calculator works the EMI formula backwards from your income and expenses to suggest a safe borrowing limit, rather than starting from a loan amount and hoping the EMI fits.