1. The Universal Reducing-Balance Formula
Banks compute loan EMIs using the reducing-balance method: `EMI = [P * r * (1+r)^n] / [(1+r)^n - 1]`. Interest is charged only on the remaining unpaid principal at each monthly cycle.
Key Takeaway: Reducing-balance calculation ensures you pay less total interest than flat-rate calculations.
2. Worked Step-by-Step Example
On a loan of ₹5,00,000 at 12% annual interest for 5 years (60 months), monthly rate `r = 0.01`. The resulting EMI is exactly ₹11,122 per month with total interest of ₹1,67,333.