Loan EMI explained: the formula, an example and the costs

An EMI (equated monthly instalment) is the same sum you pay every month until a loan is cleared. Part of each payment is interest; the rest pays off the loan. This guide explains the arithmetic only and is not financial advice.

The formula

On a reducing-balance loan, each month’s interest is charged only on what you still owe. The equal instalment that clears it is:

EMI = P × r × (1 + r)ⁿ ÷ [(1 + r)ⁿ − 1]

Here P is the loan, r the monthly rate (annual rate ÷ 12 ÷ 100) and n the number of months. The EMI calculator uses this formula.

A worked example

Take Tk 5,00,000 over 3 years (36 months) at 12% a year. The 12% is only an example, not any bank’s rate. The monthly rate is 1%, and (1.01)³⁶ ≈ 1.430769.

Month 1’s interest is 1% of Tk 5,00,000; the rest cuts the loan. As the balance falls, so does the interest: about Tk 164 in the last month. A bank’s schedule may differ by a few taka through rounding or day counting. Over 5 years the instalment drops to Tk 11,122.22, but interest rises to Tk 1,67,333.43.

Why a flat rate looks cheaper

A flat rate charges interest on the whole original loan for the whole term, though you repay some of it every month. Say the same loan is offered at “7% flat”:

The “7%” loan costs Tk 7,142 more; as a reducing rate it is about 12.8%. On a 3-year loan, a flat rate costs about as much as a reducing rate nearly twice as high, because on average you owe only about half the loan.

Costs beyond interest

Bangladesh Bank’s master circular on bank charges (June 2021) sets these limits for banks:

• Processing fee: at most 0.5% of a loan up to Tk 50 lakh, no more than Tk 15,000 (Tk 2,500 on the example); above Tk 50 lakh, 0.3%, up to Tk 20,000. No application fee.
• Documentation, CIB, stamp, legal and valuation charges: at actual cost. No service or loan-management fee on top of interest.
• Early settlement: at most 0.5% of what is outstanding. After 12 instalments about Tk 3,52,792 is still owed on the example, so at most about Tk 1,764.
• Late payment: since 13 May 2026, penal interest on a term loan is capped at 0.5% (it was 1.5%), on the overdue instalment only.

Banks must display their schedule of charges and may not charge anything outside it.

How lending rates are set now

In June 2023 Bangladesh Bank set the maximum lending rate as a reference rate, SMART (the six-month moving average of Treasury bill rates), plus a margin. On 8 May 2024 it withdrew SMART: rates are now market-based, agreed between bank and customer. Under the rules that remain:

• Each bank declares a rate for each sector, and may go 1% above or below it depending on the customer’s risk.
• The sanction letter must say whether the rate is fixed or variable; if variable, how often and by how much it can rise in a year.
• Every bank’s declared rates, including consumer credit and housing loans, are on Bangladesh Bank’s lending rate page.

Before you compare offers

• Compare reducing-balance rates, not flat ones.
• Look at the total paid, not just the instalment.
• Add the processing fee and other charges.
• Check whether the rate is fixed or variable.
• Ask about the early settlement fee and part-prepayment.
• Keep the instalment well within your monthly income.

Sources

• Bangladesh Bank: BRPD Circular No. 10, 8 May 2024
• Bangladesh Bank: BRPD-1 Circular Letter No. 17, 13 May 2026
• Bangladesh Bank: Master Circular on Schedule of Charges, 10 June 2021
• Bangladesh Bank: scheduled banks’ lending rates