In an effort to attract more customers, lenders compete with each other by offering flexible loan repayment options, instant loan approval and disbursal, and minimal paperwork. Keeping the varying needs of the customers in mind, banks offer different types of loan repayment options. There are 2 types of EMI payments that a borrower can choose to make - EMI in Advance and EMI in Arrears.
Unsecured and secured loans like personal loans and car loans (respectively) are repaid in Equated Monthly Installments (EMIs) by the borrower to the lender over a specified period of time called the loan tenure. The EMI payments made each month consists of the principal amount and the interest. By repaying a loan in EMIs over a specified period of time, the borrower can create a budget to balance his or her monthly income and expenses. The borrower can find out how much the loan will cost him or her on a monthly basis by using an online personal loan or car loan EMI calculator.
What is EMI in Arrears?
EMI in Arrears is also known as the Arrears EMI or the standard EMI. Here, the borrower has to make EMI payments at the end of each month over a specified loan tenure to repay the loan. In this case, the lender disburses the entire principal loan amount minus the processing fee to the borrower's bank account without any deduction for an advance EMI payment. The Arrear EMI scheme is ideal if you don’t have sufficient funds to make a down payment on a car of your choice.
What is Advance EMI?
EMI in advance is also known as Advance EMI. This type of EMI payment is offered by many banks in the country. Here, the first EMI payment is made in advance to the bank wherein, the principal amount minus the processing fee and the first EMI amount is disbursed to the borrower's bank account.
In this case, the first EMI payment made in advance will not consist of the interest payment, only the principal amount. This way, the principal loan amount is reduced for the rest of the EMI payments.
Note: The EMI payments following the first advance EMI payment will consist of both the principal amount and the interest.
For better understanding, here is an example of Advance EMI and Arrear EMI schemes for a car loan. Let’s say, the total price of the car you wish to buy is Rs.4.5 lakh, the car loan amount you apply for is Rs.3 lakh at an interest rate of 12% p.a. for a tenure of 3 years (36 months) with a processing fee of Rs.3,000.
|EMI scheme||Arrear EMI||Advance EMI|
|Disbursed Loan Amount||Rs.2,97,000 (Rs.3,00,000 - Rs.3,000)||Rs.2,87,134 (Rs.3,00,000 - Rs.3,000 - Rs.9,866)|
|Down Payment||Rs.1,53,000 (Rs.4,50,000 - Rs.2,97,000)||Rs.1,62,866 (Rs.4,50,000 - Rs.2,87,134)|
|Total Cost of the Car||Rs.5,11,704 (Rs.1,53,000 + Rs.9,964 * 36)||Rs.5,08,176 (Rs.1,62,866 + Rs.9,866 * 35)|
The difference between Arrear EMI and Advance EMI in the above example is Rs.98.
The down payment is higher in Advance EMI by Rs.9,866.
The total cost of the car in Arrear EMI is higher by Rs.3,528.
Advance EMI Vs Arrear EMI
Here are the difference between an Advance EMI and an Arrear EMI to help you choose a loan repayment that is best suited to you:
|Advance EMI||Arrear EMI|
|Make 1 EMI payment in advance at the time of loan disbursal.||No advance EMI payments need to be made.|
|The principal loan amount minus the one-time processing fee and one advance EMI payment is disbursed to the borrower’s bank account (or paid to the car dealer in the case of car loan).||The principal loan amount minus the one-time processing fee is disbursed to the borrower’s bank account.|
|The first EMI payment which is the advance EMI payment consists of only the principal amount.||All the EMI payments in this standard EMI scheme consists of the principal amount and the interest.|
|The Annual Percentage Rate (APR) of the loan (which is the total cost of the loan) is usually higher in an Advance EMI scheme.||The Annual Percentage Rate (APR) of the loan (which is the total cost of the loan) is usually lower in an Arrear EMI scheme.|
|The principal loan amount and EMI payments are lower in an Advance EMI scheme.||The principal loan amount and EMI payments are higher in an Arrear EMI scheme.|
|The down payment is higher in an Advance EMI scheme.||The down payment is lower in an Arrear EMI scheme.|
In conclusion, it is advisable to opt for an Advance EMI scheme only if you can afford to make an advance EMI payment in addition to the down payment (on a car) at the time of loan disbursal. Otherwise, it is better to settle for an Arrear EMI scheme. Use an online personal loan or car loan EMI calculator to find out the total cost of your loan for both the EMI schemes and choose one that costs you less.
- Can I opt for EMI in advance if the interest rate is floating or fixed?
- If I don't have enough funds for a down-payment on my loan, which kind of EMI will be better?
- Does the interest get deducted from the beginning itself when it is an advance EMI?
Yes, you can opt for EMI in advance even if the interest rate is a floating rate.
For those who don't have sufficient funds to make a down-payment on a loan, EMI in arrears would be the ideal option. This is because the full loan amount minus the processing fees will be disbursed and you only have to pay the instalment on a monthly basis.
In an advance EMI, only the principal amount is deducted in the first EMI. After the initial EMIs, both the interest and principal components of the loan start getting deducted every month.