Loan Repayment (EMI)
The fixed monthly payment on a loan, and what the interest costs over the whole term.
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Formula
How the calculation works
A repayment loan has a level payment, and each payment settles that month's interest first with the rest reducing the balance. On 20,000 at 7.5% the monthly rate is 0.625%, so month one charges 125 of interest, and of the 400.76 payment only about 276 touches the principal. That is why the balance falls slowly at the start and quickly at the end.
The term trades the instalment against the total cost. The same 20,000 at 7.5% over five years is 400.76 a month and 4,045.54 of interest; over ten years the payment drops to about 237 but the interest roughly doubles to around 8,485. A smaller instalment is not a cheaper loan, and the total interest is the number that decides that.
The rate here is the quoted annual rate divided by twelve, the convention behind the advertised figure, and it is not the effective annual rate. The tool rounds the term to whole months and treats a zero rate as a plain split, so an interest-free loan is simply principal over months. Fees, insurance and any early-repayment charge sit outside it and raise the real cost.
Common mistakes
- Choosing the loan on the monthly payment alone. The ten-year option looks gentler at 237 a month, but it carries roughly double the interest of the five-year one.
- Treating the quoted annual rate as the effective cost. It is divided by twelve to get the monthly rate, and fees on top push the real cost higher still.
- Expecting the balance to fall evenly. Because interest is charged first, after a couple of years you have repaid far less principal than the number of payments suggests.
When to use it
- Use it before signing, to see the fixed monthly figure and the total interest, and to compare two terms or two lenders on what they really cost.
- It is the wrong tool for a revolving balance you pay down by choice, such as a card, where the months to clear are the question; use credit-card-payoff for that, and remember this figure excludes fees.
Worked example
20,000 at 7.5% over five years costs 400.76 a month, with 4,045.54 of interest.
Common questions
A longer term lowers the instalment — what is the catch?
The instalment falls but the total interest climbs sharply. A smaller payment is not a cheaper loan; the total is what matters.
Does this include other fees?
No. Interest and principal only. Add any processing fee or insurance separately; those raise the real cost.
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