EMI vs Simple Interest
EMI (Equated Monthly Installment) uses a reducing-balance method where interest is charged on the outstanding principal each month. Simple interest computes interest on the original principal for the entire loan term. For typical consumer loans, EMI generally results in lower interest over time because the principal reduces as you pay.
How EMI Works
With EMI, every payment contains an interest component (on the outstanding balance) and a principal component. Over time, interest portion falls and principal portion rises.
How Simple Interest Works
Simple interest = Principal � Rate � Time. The interest is usually calculated on the original principal for the whole tenure, and then added to the principal to determine total amount payable.
Example Comparison
For a loan of ₹1,00,000 at 10% p.a. for 2 years:
- Simple interest = 100000 � 0.10 � 2 = ₹20,000 ? Total payable = ₹1,20,000
- EMI (reducing balance) will result in less total interest because principal is repaid monthly. Use the calculator to see exact EMI.
When Simple Interest Appears
Some short-term loans, payday loans, or informal lending may use a simple interest model. Always confirm the repayment structure.
Practical Tip
When comparing offers, always ask lenders to show an amortization schedule or provide an effective annual rate (APR) so you can compare different interest calculation methods fairly.