Why Your First EMI Is Mostly Interest
A reducing-balance loan front-loads interest. Here is the arithmetic behind the first year, and why prepaying early saves more than prepaying late.
The instalment is fixed, the split is not
Interest is charged on the outstanding balance. In month one that balance is the whole loan, so a 1,000,000 loan at 18% generates 15,000 of interest in the first month alone. If the EMI is 25,393, only about 10,000 touches the principal.
By year three the ratio flips
As the balance falls, interest falls with it. The same payment now clears far more principal. This is why a 200,000 prepayment in year one removes years of interest, while the same amount in year four removes very little.
Flat rate versus reducing balance
A flat rate charges interest on the original amount for the whole tenure. A 10% flat rate is roughly an 18% reducing-balance rate. Car loans often quote flat rates — always ask which method produced the EMI.
What to do with this
Compare total repayment, not the monthly figure. Then compare the effective rate. The monthly number is a comfort metric; the total is the cost.