Calculation Methodology & Mathematical Transparency

At PrepayMyLoan.com, our core principle is complete mathematical transparency. We believe borrowers should know exactly how their interest is computed, how reducing-balance amortization functions, and what assumptions govern every projection.

1. Equated Monthly Installment (EMI) Formula

In Indian retail banking (SBI, HDFC Bank, ICICI Bank, Axis Bank, LIC HFL, etc.), standard loan repayments are structured using the standard annuity formula on a monthly reducing balance:

Where:

• P: Loan Principal amount (₹)
• r: Monthly interest rate = (Annual Interest Rate in % / 100) / 12
• n: Total loan tenure in months = Tenure in Years × 12

Worked Example:

For a ₹50,00,000 home loan at 8.5% p.a. for 20 years (240 months):

• P = 50,00,000
• r = (8.5 / 100) / 12 = 0.00708333
• n = 240
• (1 + r)ⁿ = (1.00708333)²⁴⁰ = 5.4385
• EMI = [50,00,000 × 0.00708333 × 5.4385] / [5.4385 - 1] = ₹43,391

2. Reducing-Balance Amortization Mechanics

In a reducing-balance loan, every monthly installment of ₹43,391 is split into two components:

1. Monthly Interest Component: Interest_m = Balance_(m-1) × r
2. Monthly Principal Repayment: Principal_m = EMI - Interest_m
3. Ending Principal Balance: Balance_m = Balance_(m-1) - Principal_m

In the initial years of a long-term mortgage, the interest component accounts for more than 75% to 80% of each EMI. Over time, as the principal balance decreases, the interest burden drops, and a larger share goes toward principal payoff.

3. Loan Prepayment Mathematics (Part-Payment)

When you make a lump-sum prepayment of amount Lump at month m, the payment is credited 100% directly against the outstanding principal balance:

Starting from the very next monthly cycle, interest is calculated on New_Balance rather than the old higher balance.

Scenario A: Tenure Reduction (Keep EMI Constant)

If you keep your monthly EMI payment unchanged at EMI, the remaining number of months n_new to liquidate New_Balance is computed using the logarithmic inversion of the annuity equation:

Tenure Saved (Months): n_remaining - n_new
Total Interest Saved: Old_Remaining_Interest - [(EMI × n_new) - New_Balance]

Scenario B: EMI Reduction (Keep Tenure Constant)

If you choose to keep the original remaining tenure n_remaining, the bank recalculates a lower monthly installment EMI_new:

Monthly Cash Savings: EMI_old - EMI_new

4. Home Loan Balance Transfer (Refinancing) Math

A balance transfer replaces an existing loan with a new loan at interest rate r_new:

• Gross Interest Savings: Total_Interest_Old - Total_Interest_New
• Total Transfer Costs: Processing_Fee + Legal_Valuation_Charges + MODTD_Stamp_Duty
• Net Savings: Gross_Interest_Savings - Total_Transfer_Costs
• Break-Even Horizon (Months): Total_Transfer_Costs / (EMI_old - EMI_new)

5. Fixed Deposit (FD) Compounding Formula

In Indian banking, Fixed Deposits compound quarterly (4 times per year), as standardized by the RBI:

Where P is the principal deposit, r is the annual interest rate, and t is duration in years.

6. Recurring Deposit (RD) Formula

Because each monthly installment in an RD is invested for a different duration, the maturity value is calculated by compounding each monthly deposit quarterly as per Indian Post Office and commercial bank rules:

Where P is the monthly deposit, i = r / 400 is the quarterly rate, and n is the number of quarters.

7. Mutual Fund Systematic Investment Plan (SIP) Math

SIP projections assume regular monthly investments compounding at expected annual return i:

Where P is the monthly SIP installment, i = Annual CAGR / 1200, and n is the number of months.

8. Review & Reporting Discrepancies

If you discover a formula discrepancy or would like to verify an edge case against a specific bank schedule, please report it via our Contact Us page or email support@prepaymyloan.com. All reported mathematical discrepancies are investigated within 24 to 48 hours by our lead analyst.