How a personal loan EMI is calculated
Personal loan EMIs use the same reducing-balance formula as any other instalment loan:
EMI = P × r × (1 + r)n / ((1 + r)n − 1)
where P is the loan amount, r is the monthly interest rate (annual rate ÷ 12 ÷ 100), and n is the number of monthly instalments.
where P is the loan amount, r is the monthly interest rate (annual rate ÷ 12 ÷ 100), and n is the number of monthly instalments.
Why personal loan rates are higher
A personal loan is unsecured — there is no property, vehicle or deposit backing it. If you default, the lender has no asset to recover, so lenders price in that extra risk with a higher interest rate than a secured loan like a home loan. In exchange, personal loans are usually faster to process, need less documentation, and can be used for any purpose.
What lenders typically look at
- Credit score — a strong score is often the single biggest factor in the rate you're offered.
- Income and employer — salaried applicants at established employers are often treated more favourably than early-stage business income.
- Existing obligations — your FOIR matters here just as much as for any other loan.
- Loan tenure — personal loans are typically capped at 5-7 years, shorter than secured loans.
Watch the total cost, not just the EMI. A longer tenure lowers the EMI but can significantly raise the total interest paid, especially at personal-loan interest rates. Processing fees and prepayment charges (some lenders restrict early closure in the first year) also add to the real cost — always ask for the total cost, not just the advertised rate.