How EMI Amortization Works
When you take out an auto loan, personal loan, or mortgage, you repay it through an Equated Monthly Installment (EMI). This means your monthly payment stays exactly the same for the entire life of the loan, but what that payment is actually paying for changes every month.
The See-Saw of Principal and Interest
Interest is calculated every month based on your remaining principal balance. During your very first payment, your principal balance is at its highest, so the interest charge is at its highest. Therefore, most of your first EMI payment goes to the bank as profit, and only a small fraction goes toward reducing your debt.
By your final payment, the principal balance is almost zero. The interest charge is tiny, so almost 100% of your EMI goes toward paying off the debt.
The Danger of Long-Term Loans
Dealers often sell cars by asking, "What monthly payment are you looking for?" They then stretch the loan term to 6 or 7 years to hit that target. While the monthly EMI drops, the total interest paid skyrockets. You also risk becoming "underwater" on the loan—owing more than the car is worth—because cars depreciate faster than a 7-year loan pays down principal.