What will the instalment actually be?

Worked through on the home loan preset: ₹50,00,000 at 8.5% over twenty years. The monthly rate is 0.0070833, the term is 240 months, and (1.0070833) raised to 240 is 5.4457. The formula gives ₹43,391 a month.

Over the full term that is ₹1.04 crore repaid on ₹50 lakh borrowed, of which ₹54.14 lakh is interest. On a twenty-year loan at this rate, slightly more than half of everything you repay is interest, and in the first month ₹35,417 of the ₹43,391 instalment is interest with only ₹7,974 reducing the debt.

It makes the instalment smaller and the loan much more expensive, and this is the single most consequential thing on the page. The same ₹50 lakh at 8.5% costs ₹43,391 a month over twenty years and ₹38,446 over thirty. That saves ₹4,945 a month.

The interest bill goes from ₹54.14 lakh to ₹88.40 lakh. Ten extra years buy ₹4,945 a month of relief and cost ₹34.26 lakh of extra interest, which raises the interest bill by roughly two thirds. Lenders lead with the instalment because it is the number borrowers compare.

On the home loan preset, moving from 8.5% to 9% raises the instalment from ₹43,391 to ₹44,986 and the interest bill by ₹3.83 lakh. That is worth knowing before you accept the first offer, because the rate is usually the last term still open once the amount and the tenure are settled, and half a point is a realistic negotiation on a good credit record. The line under the result recomputes it for whatever loan you enter.

Because interest is charged on what you still owe, and at the start you owe almost all of it. On the home loan preset, 82% of the first instalment is interest. The share falls every month as the balance comes down, which is why the balance curve on the chart is shallow at the start and steep at the end, and why a prepayment made in year three is worth several times one made in year fifteen.

Under the old regime, home loan interest is deductible up to ₹2 lakh a year on a self-occupied property, and education loan interest is deductible without a ceiling for up to eight years. Car, personal and gold loan interest is not deductible for an individual. None of these deductions is available under the new regime, which is the part most borrowers miss now that the new regime is the default. The deduction changes the effective cost of the loan and the arithmetic on this page does not include it.

A reducing balance rate charges interest on what you still owe, so the interest falls as the loan is repaid. A flat rate charges interest on the original amount for the whole term, regardless of what you have repaid. The two are not comparable: a 9% flat loan is roughly a 16% reducing-balance loan. Flat rates still appear on vehicle and consumer finance, and the rule is that a rate quoted as flat should be converted before it is compared with anything.

Lenders generally look for total instalments below 40% to 50% of net monthly income, and a home loan alone below about 35%. Those are underwriting limits rather than good advice: they are the point at which a lender starts to worry, not the point at which the borrowing starts to hurt. The tighter constraint is usually what is left after the instalment for saving, which is what the loan is quietly competing with.

A prepayment is a certain, tax-free return equal to your loan rate, which is a higher bar than it looks. An investment has to beat that rate after tax to win, and it has to do so without the certainty. The comparison also has to count the deduction on home and education loan interest, which lowers the effective loan rate for someone in the old regime. That calculator is on the way; in the meantime the home loan page shows what a prepayment saves on the loan side of it.