How EMI is calculated
A plain-English explanation of the EMI formula, how reducing-balance interest works, and what affects your monthly instalment.
Content reviewed: September 2026
What EMI means
EMI stands for Equated Monthly Instalment — the fixed amount you pay a lender every month until a loan is fully repaid. Each instalment covers two things: part of the principal (the amount you borrowed) and the interest charged on the balance still owed.
The formula
Banks in Bangladesh typically use the reducing-balance formula:
- P — loan amount
- r — monthly interest rate (annual rate ÷ 12)
- n — number of monthly payments
Why early payments are mostly interest
Because interest is charged on the remaining balance, the balance is largest at the start of the loan — so most of your early EMI goes to interest. As the balance falls, the interest portion shrinks and more of your payment goes toward the principal. This is called a reducing-balance loan.
Worked example
A loan of ৳1,000,000 at 10% per year for 10 years (120 months):
- Monthly EMI ≈ ৳13,215
- Total interest over the term ≈ ৳585,809
What can change your EMI
- Interest rate — a higher rate raises the EMI.
- Loan term — a longer term lowers the monthly EMI but increases total interest.
- Fees and insurance — processing fees and compulsory insurance can effectively raise the cost.
- Floating rates — if your rate is not fixed, the EMI can change.
Try the EMI Calculator to see your own numbers, including a full amortization schedule.