Principal, Interest & EMI

Every Equated Monthly Installment (EMI) payment you make on a loan in Canada or the US consists of two components: principal and interest. Understanding how these components evolve over time can help you manage your loan effectively.

This guide breaks down the principal and interest within your EMI payments, showing how they change over the loan term for borrowers in Toronto, Vancouver, New York, and beyond. Use our free EMI calculator to see your own EMI breakdown.

Your EMI payments are made up of:

• Principal: The original amount you borrowed, which decreases with each EMI payment as you repay the loan.
• Interest: The cost of borrowing, calculated on the remaining principal each month, using the formula: Interest = Remaining Principal × Monthly Interest Rate.

Over the loan term, the total EMI remains constant, but the proportion of principal and interest shifts, with early payments covering more interest and later payments focusing on principal repayment.

The EMI formula, EMI = P × r × (1 + r)^n / [(1 + r)^n - 1], ensures a fixed monthly payment, but the breakdown changes over time:

• Early Stage: Most of the EMI goes toward interest, as the remaining principal is high, leading to higher interest charges.
• Mid Stage: The balance shifts, with a more even split between principal and interest as the principal decreases.
• Late Stage: The majority of the EMI reduces the principal, as the interest component shrinks due to the lower remaining balance.

This structure ensures the loan is fully repaid by the end of the term, with the principal gradually reduced to zero.

The chart below shows the breakdown of a $20,000 loan at 5% annual interest over 3 years (36 months), illustrating how the EMI ($599.42) splits between principal and interest over time.

Here’s a breakdown of the first 5 EMI payments for a $20,000 loan at 5% annual interest over 3 years in Canada and the US:

This breakdown shows how the interest component decreases and the principal component increases over time, reducing the loan balance with each payment.

Ready to see your EMI breakdown? Use our free EMI calculator to test scenarios for your loan in Canada or the US.