SAHITOOL JOURNAL

How an EMI and an extra payment change your loan balance

SAHITOOL Editorial · Published 2026-11-10 · Updated 2026-11-10

A worked example of monthly reducing-balance interest, repayment schedules and why a prepayment changes future interest.

An EMI is a planned monthly payment towards a loan. With a fixed interest rate and equal payment periods, the payment can stay constant while its split changes: interest is larger when the outstanding balance is larger, and the principal share grows as the balance falls.

Start with one month, not a headline saving

Suppose the outstanding principal is ₹1,00,000 and the nominal annual rate is 12%. Under a monthly reducing-balance model, the monthly rate is 1%. The first month’s interest is therefore ₹1,000. If the payment is ₹8,884.88, about ₹7,884.88 reduces principal and the balance becomes approximately ₹92,115.12. Rounded lender schedules can differ by a few paise.

The standard fixed-payment formula is P × r ÷ (1 − (1 + r) raised to the power −n), where P is principal, r is the monthly rate and n is the number of payments. At zero interest, divide principal by the number of months instead. This zero-rate case matters because dividing by the general formula directly would produce an undefined expression.

Why an extra payment can help

An extra principal payment reduces the balance on which later interest is calculated. In this example, an additional ₹5,000 after the first scheduled payment would reduce the next opening balance to approximately ₹87,115.12. With a 1% monthly rate, the following month’s interest would be about ₹871.15 rather than ₹921.15: a difference of ₹50 for that month. This is a model illustration, not a promise of the total saving on a real loan.

Whether an actual lender reduces the tenure, reduces the instalment or applies charges depends on your agreement. Payment dates, day-count conventions, floating-rate changes and fees can also change the result. Read the lender’s terms before acting.

Compare like with like

When comparing scenarios, keep the principal, rate, start date and fee assumptions consistent. Check both the monthly cash requirement and the total interest. A lower EMI achieved by extending the term may increase total interest.

Use the SAHITOOL Loan Intelligence Studio to explore assumptions and inspect the schedule. Calculations are estimates. They do not assess your affordability, recommend a loan or replace your lender’s statement.