ATM :: Loan Basics: Making the most of EMIs

ADHIL SHETTY | published on February 7, 2016 | The Hindu BusinessLine
Avoiding pre- EMIs and opting for tranches can get you more bang for buck


The concept of repaying loans with equated monthly instalments (EMIs) is preferred by many borrowers. This is especially true for big financial commitments like home loans, where repayment in one go is near impossible.

But ensuring small savings in EMIs and better management can make a huge difference to your finances. Here is a look at how smart planning of EMI commencement can help you save money over the long run.

EMI versus pre-EMI
The interest outflow differs for ready-to-move-in properties and under-construction properties. While a full loan disbursement is made on a ready-to-move-in property, the bank makes disbursements to the builder for an under-construction property in instalments. In the latter case, the disbursement to the builder is usually linked to the level of construction.

Many people purchase under-construction properties to save some money on the final ownership cost, but sometimes end up burning a hole in their pockets by paying heavy pre-EMI interest.

Suppose the builder takes 20 months to complete the construction, you need to pay 19 pre-EMI instalments before your regular loan EMI starts. This amount will not reduce your principal outstanding and consists of interest only. The longer the builder takes to finish the construction, the higher your interest outflow.

For example, if in the above case, a loan of ₹50 lakh is taken at 10.5 per cent, the borrower pays around ₹3.9 lakh in pre-EMI interest, assuming his loan disbursement happens every alternate month.

Saving on pre-EMIs
Borrowers have the option of signing up for tranche EMIs, where one can start repayment of the home loan itself, right after the first disbursal by the bank. If the borrower takes a ₹50 lakh loan for a 20-year tenure, his total monthly EMI will come to ₹49,918. He can pay back ₹1.19 crore in total if he opts for tranche EMIs. This means he will have to pay ₹69.8 lakh as interest. However, if he takes the pre-EMI route, his total interest outflow will now increase by ₹3.9 lakhs, that is, he will have to pay a total interest of ₹73.7 lakh.

Apart from a tranche EMI, advance disbursement facility (ADF) is another option to save pre-EMI interest. If your builder has a tie-up with the bank, the bank may disburse the entire loan amount at one stretch, providing advance funding for the builder. In this case, you can start paying the EMI straightaway.

EMI management
Shorter the tenure, higher the EMI, but lesser the interest outflow: Any change in tenure can change your EMI substantially. For example, if the above loan of ₹50 lakh is taken for a period of 15 years only, the EMI works out to ₹55,270 and the total repayment ₹99.4 lakh. This translates to an interest saving of around ₹20 lakh. However, while choosing a higher EMI, do ensure that you can afford it.

Timing EMIs: The timing of EMIs is important to avoid defaults. It is ideal not to keep EMI dates towards the last week or first date of the month. If it is first date of the month and your EMI debits are linked to your salary account, any delay in salary credit and consequent insufficient account balance can cause a missed EMI on your loan account. As many salaried people are likely to exhaust their savings account during the last week after all bill payments, it is best to keep the dates anywhere between 5{+t}{+h} and 20{+t}{+h} of every month. If you have more than one loan, plan your EMIs on the same date or with sufficient gaps, as convenient.

Any minor savings in EMI can mean a lot in the long run. Therefore, if you do not plan to get the full sanctioned loan amount for an under-construction property, get your loan amount downsized and start your EMIs instead of paying pre-EMI interest.

The writer is CEO,

Source :

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