The EMI Formula
EMI = P × [r(1+r)^n] / [(1+r)^n − 1]
- P = loan principal
- r = monthly interest rate (APR ÷ 12)
- n = total number of monthly payments
Common Mistakes
- Using the annual rate directly instead of the monthly rate — always divide APR by 12 first.
- Forgetting to include the down payment — the formula uses the financed amount, not the sticker price.
- Ignoring total interest paid — a lower EMI from a longer term often means paying substantially more overall.
Quick Reference
Every extra 12 months on a loan term typically lowers EMI by 10-15% but raises total interest paid by a similar or greater percentage — there's rarely a free lunch in loan terms.
Frequently Asked Questions
Why do dealerships push longer loan terms?
Longer terms lower the advertised monthly payment, making an expensive car look more affordable — while quietly increasing the total interest the dealer's financing partner collects over the life of the loan.
Should I finance or lease?
Financing builds equity toward eventual ownership; leasing typically has lower payments but you own nothing at the end. The EMI formula only applies to financing, not lease calculations.
