Q.Mohan takes a loan of ₹5,00,000 with 8% annual interest rate for 6 years. Calculate EMI under Flat-Rate system.

The key idea is that under a Flat Interest Rate system, interest is calculated on the full principal for the entire loan tenure, regardless of repayments made.

Step 1: Calculate total interest.

Interest per year = $5,00,000 \times \frac{8}{100} = ₹40,000$.

Total interest for 6 years = $40,000 \times 6 = ₹2,40,000$.

Step 2: Find total amount to repay.

Total amount = Principal + Total interest = $5,00,000 + 2,40,000 = ₹7,40,000$.

Step 3: Compute monthly EMI.

Number of monthly instalments = $6 \times 12 = 72$.

EMI = $\frac{7,40,000}{72} = ₹10,277.78$ (approximately).

The Concept: Why Flat-Rate EMI Works This Way

Most people intuitively think of loans like a home loan — you pay interest only on the remaining principal each month. That’s the reducing-balance method. But the flat-rate system is different, and it’s often used for personal loans, car loans, or consumer durables in India.

Here’s the key: in a flat-rate loan, the interest is calculated once on the entire loan amount for the full tenure, and then added to the principal. The total amount (principal + total interest) is then divided equally across all months. This means you pay the same EMI every month, but the interest component in each EMI is much higher than it would be under a reducing-balance system for the same rate.

Step-by-Step Calculation

Let’s break it down into clear steps.

1. Identify the given values.

• Principal, $P = ₹5,00,000$
• Annual interest rate, $R = 8\%$ per annum
• Loan tenure, $T = 6$ years

2. Calculate the total interest for the entire loan period.

Since interest is charged on the full principal for the full 6 years:

Substitute the values:

First, compute $5,00,000 \times \frac{8}{100} = 5,00,000 \times 0.08 = 40,000$.

Then, $40,000 \times 6 = 2,40,000$.

So, the total interest payable over 6 years is ₹2,40,000.

3. Find the total amount to be repaid.

This is simply the principal plus the total interest:

4. Determine the number of monthly instalments.

The loan is for 6 years, so:

5. Compute the EMI.

The EMI is the total repayment divided equally over the number of months:

Now perform the division:

Simplify further: $1,85,000 \div 18$.

• $18 \times 10,277 = 1,84,986$
• Remainder: $1,85,000 - 1,84,986 = 14$ So, $10,277 + \frac{14}{18} = 10,277 + 0.777... = 10,277.777...$

Rounding to the nearest paisa (two decimal places), we get ₹10,277.78.

Final Answer