A money lender gives a specific amount of money to the borrower with a condition that the amount borrowed is paid back with interest as monthly installments. These installments are given over a predetermined period of time by the borrower and are referred to as EMI.
EMI = [P x R x (1 + R) ^ N] / [(1 + R) ^ (N - 1)]
P - principal ( borrowed as a loan)
R - rate of interest that is levied on the loan amount (monthly rate)
N - tenure of repayment of the loan
A person took a personal loan of Rs. 2 lakhs for 2 years at an interest of 20 % p.a. Divide the annual interest rate by the number of months in a year, i.e. 12, so monthly 20/12 = 1.66% per month. Now the 2-year loan tenure should be converted into months before integrating into the above formula i.e. 24 months.