How is Loan Repayment Calculated

When you are applying for a loan, it is prudent to find out all you can about the repayment conditions such as interest rest, repayment term, etc. to ensure that the loan you are availing is within your repayment ability. 

In simple words, it is always good to ensure that you will be able to repay the loan every month without additional stress on your finances.

One of the best ways to do this is to check the amount you will be paying as EMI or Equated Monthly Installments.

Loan repayment is generally calculated by using one of the two methods given below –

  1. Equated Monthly Instalments (EMI)
  2. Non-Equated Monthly Instalments

Equated Monthly Instalments (EMI)

calculate EMI loan

EMI is the most commonly used option to recover the loan amount along with interest over the repayment term. 

As the name suggests, monthly installments are ‘equated’ or split across the repayment term so that the amount paid by the borrower remains the same for the entire term. 

Your EMI will depend on the loan amount availed, interest rate charged, as well as the repayment term. Calculating your EMI is not hard as there are some really good EMI calculators online

Here is a small illustration of what your EMI schedule can potentially look like –

Loan Amount – Rs. 10 lakhs

Loan Term – 10 years

Rate of Interest – 12% per annum

Year Opening Balance Repayment Interest Principal Repaid Closing Balance
1 10,00,000 1,76,984 1,20,000 56,984 9,43,016
2 9,43,016 1,76,984 1,13,162 63,822 8,79,194
3 8,79,194 1,76,984 1,05,503 71,481 8,07,713
4 8,07,713 1,76,984 96,926 80,058 7,27,655
5 7,27,655 1,76,984 87,319 89,665 6,37,990
6 6,37,990 1,76,984 76,559 1,00,425 5,37,565
7 5,37,565 1,76,984 64,508 1,12,476 4,25,089
8 4,25,089 1,76,984 51,011 1,25,973 2,99,116
9 2,99,116 1,76,984 35,894 1,41,090 1,58,026
10 1,58,026 1,76,989 18,963 1,58,026
Total     17,69,845   7,69,845 10,00,000

For the sake of simplicity, the repayment has been assumed to be on a yearly basis.

As is also evident from the table above, the features of EMI  are –

  1. Monthly repayment amount remains the same throughout the term
  2. The principal repayment is the lowest during the first EMI
  3. The principal, being repaid, steadily increases over the loan tenor
  4. The interest amount decreases over time due to reduction of the outstanding principal amount

Non-Equated Monthly Instalments

calculate EMI loan

Unlike EMIs, when it comes to this option, the amount paid every month does not remain the same and instead, decreases with time.

Here is a small illustration to help you understand how such installments are calculated:

Loan Amount – Rs. 10 lakhs

Loan Tenor – 10 years

Rate of Interest – 12% per annum

Year Opening Balance Repayment Interest Principal Repaid Closing Balance
1           10,00,000       2,20,000   1,20,000             1,00,000   9,00,000
2               9,00,000       2,08,000   1,08,000             1,00,000   8,00,000
3               8,00,000       1,96,000 96,000             1,00,000   7,00,000
4               7,00,000       1,84,000 84,000             1,00,000   6,00,000
5               6,00,000       1,72,000 72,000             1,00,000   5,00,000
6               5,00,000       1,60,000 60,000             1,00,000   4,00,000
7               4,00,000       1,48,000 48,000             1,00,000   3,00,000
8               3,00,000       1,36,000 36,000             1,00,000   2,00,000
9               2,00,000       1,24,000 24,000             1,00,000   1,00,000
10               1,00,000       1,12,000 12,000             1,00,000          
Total   16,60,000   6,60,000           10,00,000

For the sake of simplicity, the repayment has been assumed to be on a yearly basis.

The typical features of this repayment option are:

    1. Monthly repayment amount reduces as the loan gets repaid due to lowering interest amount.
    2. The principal repayment remains the same across the tenor.

Which of These Two Repayment Options is Better?

There is no right answer, as the same depends upon your financial condition and repayment cushion available.

If you can afford to pay a higher amount in the initial years, then the second option, as discussed above is better. The total interest outgo will be lower due to higher principal repayment in the earlier years. 

On the other hand, the EMI option gives you a fixed budget to work with and plan your finances. As such both options have their pros and cons and need to be analyzed on an individual basis.

In Conclusion

Understanding how your loan repayment amount and schedule is calculated is essential. This is because the amount you pay towards your loan has an impact on your finances. In case you are unable to repay your loan, your credit score will be severely affected.

Before availing a loan, discuss all possible repayment options with your lender and choose one that benefits your financial situation.

Simardeep Singh


Simardeep Singh is a Chartered Accountant based in Delhi. He loves sharing his knowledge about personal finance and investment.

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