What an EMI actually costs you

Lenders quote the monthly instalment, because it is the number that decides whether you say yes. It is also the number that tells you least about what the loan costs. The figure worth asking for is total interest.

A worked case

Borrow 25,00,000 over 20 years at 9.25%. The instalment is 22,896.67 a month. Over 240 months that is 54,95,201 paid in all, of which 29,95,201 is interest. You repay roughly 2.2 times what you borrowed, and the interest alone exceeds the principal.

The second row is a useful contrast: a much smaller loan at a higher rate, over a much shorter term, carries a similar monthly burden and a twelfth of the interest. Tenure, not rate, is usually the dominant variable.

Early instalments are mostly interest

Interest is charged on the outstanding balance, which is largest at the start. On the 25 lakh example, the first instalment is roughly four-fifths interest and one-fifth principal. That ratio inverts slowly over the term. It is why prepaying early does far more good than prepaying late, and why a loan refinanced repeatedly in its first years never really starts paying down.

Two numbers to compare, not one

1. The instalment, against what your cash flow can absorb without strain.
2. The total interest, against what the purchase is actually worth to you.

A lender optimising for approval will show you the first. Ask for the second before signing, and get it in writing rather than from a verbal summary.