When a bank in Bangladesh quotes you a loan, the two numbers that matter most are the interest rate and the monthly instalment. But most people do not know how those two figures connect — and banks are not always straightforward about it. The way the instalment is calculated, and the method used to apply interest, can make a significant difference to the total amount you repay over the life of the loan. This guide explains how EMI actually works.
The EMI Formula
EMI (Equated Monthly Instalment) is a fixed payment made each month that covers both principal repayment and interest. The standard formula used by banks in Bangladesh follows the reducing balance method.
EMI = P × r × (1 + r)ⁿ / [(1 + r)ⁿ − 1] Where: P = Principal loan amount r = Monthly interest rate (annual rate ÷ 12) n = Total number of monthly instalments (loan tenure in months) Example: ৳10,00,000 loan at 9% annual interest for 10 years (120 months) r = 9% ÷ 12 = 0.75% per month = 0.0075 n = 120 EMI = 10,00,000 × 0.0075 × (1.0075)^120 / [(1.0075)^120 − 1] EMI ≈ ৳12,668 per month Total repaid = 12,668 × 120 = ৳15,20,160 Total interest = ৳15,20,160 − ৳10,00,000 = ৳5,20,160
Reducing Balance vs Flat Rate — A Critical Difference
Some lenders in Bangladesh, particularly non-bank financial institutions and hire-purchase schemes, quote a 'flat rate' of interest rather than a reducing balance rate. These are not the same thing, and the difference is substantial. A flat rate calculates interest on the original principal for every month of the loan, rather than on the declining outstanding balance.
Comparison: ৳5 Lakh Loan, 12% Rate, 3 Years
| Method | Monthly EMI | Total Interest Paid | Effective Annual Rate |
|---|---|---|---|
| Reducing balance (standard) | ৳16,607 | ৳97,852 | 12.0% |
| Flat rate | ৳18,889 | ৳1,80,000 | Approx. 21.5% effective |
The flat rate looks lower at 12%, but the effective rate is nearly 21.5% because you are paying interest on the full principal even as you repay it. Always ask lenders whether they are quoting a flat rate or a reducing balance rate — and if it is flat, convert it before comparing.
How an Amortisation Schedule Works
With a reducing balance EMI, each monthly payment consists of an interest component and a principal component. In the early months, most of your payment goes to interest. As the outstanding balance decreases, the interest component shrinks and the principal component grows — even though the EMI stays the same throughout.
First 3 Months of ৳10 Lakh Loan at 9%, 10 Years
| Month | Opening Balance | Interest | Principal | Closing Balance |
|---|---|---|---|---|
| 1 | ৳10,00,000 | ৳7,500 | ৳5,168 | ৳9,94,832 |
| 2 | ৳9,94,832 | ৳7,461 | ৳5,207 | ৳9,89,625 |
| 3 | ৳9,89,625 | ৳7,422 | ৳5,246 | ৳9,84,379 |
Comparing Loan Offers: What to Look For
When comparing loans from different banks, the EMI figure alone is not enough — a lower EMI could mean a longer tenure and far more total interest paid. Compare these four things: annual interest rate (reducing balance), loan tenure, any processing fees or prepayment penalties, and total repayment amount over the full term.
Tip
If you can afford a slightly higher EMI, choose a shorter tenure. On a ৳20 lakh home loan, reducing tenure from 20 years to 15 years at 9% saves approximately ৳9 lakh in total interest — with the EMI increasing by only about ৳2,500 per month.