How Does EMI Work?

Equated Monthly Installment (EMI) is the cornerstone of loan repayment plans in Canada and the US, offering a structured and predictable way to pay off debts like home loans, car loans, or personal loans. This guide explores the mechanics behind EMI calculations, breaking down how payments are structured over time, and provides practical examples to help you understand the process.

Whether you’re a homeowner in Toronto or a car buyer in New York, understanding how EMI works can empower you to make informed financial decisions. Use our free EMI calculator to see how EMI impacts your loan repayment journey.

EMI is calculated using the formula: EMI = P × r × (1 + r)^n / [(1 + r)^n - 1], where:

• P is the principal loan amount (e.g., $50,000).
• r is the monthly interest rate (annual rate ÷ 12 ÷ 100).
• n is the number of monthly payments (tenure in years × 12).

This formula ensures that each EMI payment remains constant, but the proportion of principal and interest within the EMI changes over time. Initially, a larger portion of the EMI goes toward interest, while later payments focus more on reducing the principal.

The chart below shows how the EMI for a $50,000 loan at 6% annual interest over 5 years (60 months) is split between principal and interest, illustrating the gradual shift over time.

Let’s calculate the EMI for a $50,000 loan at 6% annual interest over 5 years:

• Principal (P): $50,000
• Annual Interest Rate: 6% (so monthly rate r = 6 ÷ 12 ÷ 100 = 0.005)
• Tenure (n): 5 years = 60 months

Plugging these values into the formula: EMI = 50,000 × 0.005 × (1 + 0.005)^60 / [(1 + 0.005)^60 - 1] results in an EMI of approximately $966.64. Over 5 years, the total repayment would be $57,998.40, with $7,998.40 in interest.

This example demonstrates how EMI balances principal and interest, making loan repayment manageable. Use our EMI calculator to test your own loan scenarios.

Ready to plan your loan with an EMI calculator? Use our free EMI calculator to test scenarios for your loan in Canada or the US.