The Idea of an EMI

When a person borrows money from a bank — a personal loan, a home loan, or a vehicle loan — the loan is almost never repaid as a single lump sum at the end. Instead, the borrower repays a fixed amount every month, called the Equated Monthly Instalment (EMI), until the entire loan (principal plus interest) is cleared. This chapter, part of the WBCHSE Class 12 Commerce Business Mathematics and Basic Statistics syllabus, covers EMI calculation for different types of financial loans — the syllabus's own wording is that EMI calculation "for different situations arises in real life" — but every one of these situations, whatever the loan is called, is worked out using the same single EMI formula; only the values of the principal, the rate and the tenure differ from one loan to another.

An EMI is "equated" precisely because it stays the same every single month for the whole tenure, even though, behind the scenes, the split between how much of each month's payment goes toward interest and how much reduces the outstanding principal keeps changing — early instalments pay mostly interest (since the outstanding principal is still large), while later instalments pay mostly principal (since the outstanding balance has shrunk). The formula in the next section calculates the one fixed monthly figure that achieves this.