How loan EMIs are priced
Why early instalments are mostly interest, and why prepaying early saves far more than prepaying late.
What an EMI is
An Equated Monthly Instalment is the fixed payment that clears a loan over a set tenure. “Equated” means the amount stays the same every month — but what's happening inside it changes completely: each month a little more goes to principal and a little less to interest, even though the total doesn't move.
A worked example
A ₹25,00,000 home loan at 8.5% p.a. over 20 years, with monthly instalments.
Monthly EMI
₹21.7 K
₹21,696
Total interest
₹27.07 L
108% of principal
Total payment
₹52.07 L
₹52,06,939
You borrow ₹25,00,000 and pay back ₹52,06,939 over the life of the loan — the difference, ₹27,06,939, is the price of borrowing for 20 years.
Why early payments are mostly interest
Interest is charged on the outstanding balance, not the original amount. Early on the balance is still almost the full loan, so most of your EMI is interest. In the first year of this loan, you pay about ₹2,10,591 in interest and only ₹49,756 in principal — out of ₹2,60,347 of EMIs. The split flips only near the end, when the balance has fallen low enough.
First 12 instalments of ₹25,00,000
| Month | Interest | Principal | Balance |
|---|---|---|---|
| 1 | ₹17,708 | ₹3,987 | ₹24,96,013 |
| 2 | ₹17,680 | ₹4,015 | ₹24,91,997 |
| 3 | ₹17,652 | ₹4,044 | ₹24,87,953 |
| 4 | ₹17,623 | ₹4,073 | ₹24,83,881 |
| 5 | ₹17,594 | ₹4,101 | ₹24,79,779 |
| 6 | ₹17,565 | ₹4,130 | ₹24,75,649 |
| 7 | ₹17,536 | ₹4,160 | ₹24,71,489 |
| 8 | ₹17,506 | ₹4,189 | ₹24,67,300 |
| 9 | ₹17,477 | ₹4,219 | ₹24,63,081 |
| 10 | ₹17,447 | ₹4,249 | ₹24,58,832 |
| 11 | ₹17,417 | ₹4,279 | ₹24,54,553 |
| 12 | ₹17,386 | ₹4,309 | ₹24,50,244 |
Why prepaying early saves more
Because interest is charged on the balance, every rupee you knock off early stops accruing interest for all the remaining months. A one-time ₹2,00,000 extra payment in the very first month of this loan saves about ₹7,28,801 in interest and finishes the loan roughly 42 months earlier — the same ₹2,00,000 paid twenty years in saves almost nothing, because there is no time left for it to compound.
This prepayment figure uses the same amortisation engine behind FinPlan's overdraft/Maxgain comparison, so the guide and the app can never quote different savings for the same loan.