How is the interest calculated on a personal loan?

Interest on a personal loan in India is usually worked out using the reducing balance method. This means that every month, you pay interest only on the outstanding principal, not the original loan amount. When you start repaying, your EMI (equated monthly instalment) is made up of two parts: principal and interest. In the early months, the interest portion is higher because the principal is still large. As you keep paying, the principal reduces, and so does the interest charged on it. Over time, more of your EMI goes towards the principal and less towards interest.

The EMI itself is calculated using a standard formula:

EMI = [P × R × (1 + R)^N] ÷ [(1 + R)^N – 1]

Here:

• P is principal loan amount
• R is monthly interest rate- annual rate divided by 12, expressed as a decimal
• N is the total number of EMIs or months in your loan tenure.

The total interest you pay over the life of the loan depends on the loan amount, the rate of interest, and the tenure you choose. The longer the tenure, the more interest you end up paying, even though the EMI is lower.

Most banks and lenders now offer online EMI calculators. These tools make it easy to estimate your monthly payments and the total interest you’ll pay, helping you plan your finances better before you commit to a loan. Always use these calculators to compare different loan options and choose what fits your budget.