• Factors to Consider Before Choosing the Pre-EMI Option

    What is Pre-EMI?

    Installments that precede actual Estimated Monthly Installments (EMIs) is known as Pre-EMIs. EMI is calculated in such a way that the amount contributes to Principal loan amount as well as the interest rate applicable on the loan. However, Pre-EMI is the repayment of the interest on loan and does not contribute to the principal loan amount. Pre-EMIs are paid until the full disbursement of the loan. This option is available only to home loan borrowers. In this case, the Pre-EMI will end once the construction of the home/ building is completed. EMI payments begin once the pre- EMI is paid. The outstanding loan amount is not affected by the pre-EMI payments.

    In pre-EMI mode of repayment, the financer will disburse the loan as per the construction stage of the home/ building, as agreed by the borrower. The interest amount will be paid in partial disbursements during the course of construction. After the construction is completed, the borrower will have to pay regular EMI.

    How is it Different From EMI?

    Pre-EMI is repayment of interest on loan only whereas EMI is the repayment of principal loan amount and interest applicable. When a home loan borrower chooses the pre-EMI mode of repayment, he/she will have to pay the interest on loan until the construction of the house is completed. EMI will have to be paid once this is done. Pre-EMI mode assures lower outflow of cash compared to regular EMI. This mode can be chosen also when the borrower does not have enough income capacity to pay the monthly EMIs.

    Example:

    Mr. B takes a home loan for 20 years. He chooses the pre-EMI method and pays it until construction is completed. The construction of his house is completed in 5 years, so he pays pre-EMI for 5 years. EMI payments would start from this time for a 20 year tenure. The total payment will be for a period of 5 years + 20 years.

    Calculate your EMI

    Who can opt for the Pre-EMI option?

    Borrowers who have cash flow issues and are not able to repay the loan EMIs at present, can opt for the pre-EMI option. Customers do not have to wait till the entire loan amount is disbursed. He or she can start repaying the interest on the loan amount availed using the Pre-EMI option before the total amount has been disbursed as well. Customers can also choose to switch from the Pre-EMI stage to the EMI stage mid-term before the possession. This should be done when 70% to 75% of the loan has already been drawn.

    When to avail the Pre-EMI option?

    • You can choose this option when your fund-flow is less and you won’t be able to afford paying the EMI.
    • You can opt for this scheme when you have some urgent credit needs and you want to save some money for that.
    • Since Pre-EMIs are lower than EMIs, you can further invest the difference amount in order to gain higher returns.
    • In case of home loans, you can pay Pre-EMIs to the lender when you are planning to sell the property right after the construction or within a few years after that.

    Pre-EMI Calculation Formula

    See the formula mentioned below to calculate the Pre-EMI of your loan amount:

    [P X r X (1+r) ^ n]/ [(1+r) ^ n-1]

    Here,

    P is the principal or total loan amount

    r is the rate of interest per month

    n is the total number of installments

    Key points to consider before you choose to opt for Pre-EMI option

    The Pre-EMI option is an additional benefit wherein the borrower can repay the interest amount of a loan without having any impact of the loan tenure and amount. Therefore, this facility should be used wisely. Before availing this option, customers should consider the points mentioned in the list below in order to avoid any bad debt and additional payments.

    • You should take into account how much money you currently have to repay the debt.
    • Check whether you will be capable of paying the EMI along with handling any additional expenses or not.
    • You will have to analyse the purpose of the item purchased using the loan.
    • Verify if there are going to be any returns from the purchased item.
    • In case of a home loan, take into account whether the property will be for personal use or will be sold back again once the construction is completed.
    • Calculate the total opportunity cost of money that you are planning to save.
    • You can check and compare other investment options to find out if you can get better returns from them.

    Points to be aware of before choosing the Pre-EMI option

    • The repayment of the loan amount starts only after the disbursal of the total loan amount. Until then, the amount paid as Pre-EMI neither affects the loan amount nor the repayment tenure.
    • Many a times, lenders consider the term during which the Pre-EMI has been paid to be included in the loan tenure. Therefore, the loan amount gets amortized in the rest of the tenure resulting in the EMIs to become even higher.
    • Few lenders do not allow the borrower pre-close the loan partially while he or she is paying a Pre-EMI. They can even ask the borrower to pay installments to their merchants without any reduction in the outstanding debt.
    • Sometimes, the lender might mistakenly enroll the customer for the Pre-EMI option without even checking beforehand. This can prove to be very risky if the loan application doesn’t have any provision to choose this facility.
    • There are no tax benefits to paying only the interest amount to the lender. In case of EMI, the borrower has the provision to claim the entire interest paid beforehand. On the other hand, Pre-EMIs paid before the possession of the item cannot be claimed by the individual.
    • If there is a delay in the possession due to some reason, the customer will have to pay a Pre-EMI unnecessarily.

    News about Pre-EMI Option

    • HSBC expecting RBI to increase interest rates in December

      Recent reports from HSBC suggest that the growth of India will likely remain higher in the first half of 2018. It is however expected that the growth will return to the trend rate, which is 7.1 percent by the end of 2018. The chief India economist of HSBC has said that with the new minimum support price regime due to be implemented, an interest rate increase on the back of that in the month of December is highly likely. It was also conveyed that there could be a pause after that for two quarters but another rate hike is very possible sometime in the second half of 2019. The economist also conveyed that the GDP of the country will be somewhere around 7.1 percent, the same way it has been for the last couple of years. The last time the growth undershot was in 2016-17, which was in the back of demonetization and the implementation of goods and service tax. The trends has however changed with the growth being very high in the first half of 2018, overshooting the general 7.1 percent trend.

      31 August 2018

    • The price that is paid for a no cost EMI

      Many of the credit card companies offer the option of a no cost EMI, giving an option to pay the cost of the item you wish to buy in installments without any EMI. But this is not exactly what happens in this scheme. The Reserve Bank of India in 2013 came up with a ban from offering 0% EMI of retail products. Banks have since then come up with a variant to that option by using the no cost EMI option. The no cost EMI says you do not have to pay any interest, but in reality you end up paying interest. The banks tend to take back the interest using the discount. Vendors tend to give a cashback that is equal to the interest amount or offer a discount upfront. There are basically three stakeholders when it comes to a no cost EMI - the consumer, bank and the retailer. Select banks offer a no cost EMI option on credit cards. This deal cannot be carried out if you do not have the same credit card that has the scheme. There is also an option to opt for an EMI from a non-banking finance company. The no cost EMI option is generally offered on products companies are looking to sell faster. The retailer in this case is willing to give a discount that is equivalent to the interest that will have to paid by the customer. The distributor will be the one paying the discounted amount to the customer. It is advisable to opt for this only if the product actually comes with a discount.

      17 July 2018

    • Banks are making a shift from the Base rate system to the MCLR system

      In its latest Statement of Development and Regulatory Policies notified on 7 February 2018, the Reserve Bank of India (RBI) has instructed all the SCBs to determine their benchmark rates by connecting the Base Rate to the MCLR rate from 1 April 2018. Even though the Base rate and the MCLR will still continue to exist together for some time, the Base rate will be calculated on the basis of the MCLR. As such with an increase/decrease in the MCLR, there will be an increase/decrease in the Base rate as well without any specific adjustment requirement. This new regime will particularly benefit the existing borrowers whose loans are still connected to the Base rate system.

      24 May 2018

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