Understanding how your EMI (Equated Monthly Installment) is actually calculated helps you make sense of a loan offer — and spot whether a bank's quoted figure matches what you'd expect.
The Formula
Pakistani banks generally use the reducing-balance method: EMI = P × r × (1+r)n ÷ ((1+r)n − 1), where P is your loan principal, r is your monthly interest rate (annual rate divided by 12, then by 100), and n is your total number of monthly installments.
A Worked Example
Say you borrow PKR 2,000,000 at 20% annual interest over 5 years. Your monthly rate (r) is 20/12/100 = 0.01667, and n = 60 months. Plugging into the formula gives a fixed monthly EMI — try it yourself with our Loan EMI Calculator rather than doing the math by hand.
Why the Interest Portion Decreases Over Time
Under the reducing-balance method, each EMI payment is split between interest and principal. Early payments are weighted more heavily toward interest (since your outstanding balance is largest then); later payments shift progressively toward principal as your balance shrinks — even though the total EMI amount stays the same every month.
How Loan Tenure Affects Total Cost
A longer tenure lowers your monthly EMI but increases the total interest paid over the life of the loan, since you're carrying a balance for longer. A shorter tenure raises your monthly payment but reduces total interest paid significantly — worth weighing carefully rather than just optimizing for the lowest monthly payment.
Try It Yourself
Use our free Loan EMI Calculator to compare different loan amounts, rates, and tenures instantly.