Purchasing a home or other assets with savings is nearly tricky today. Every day, and in a big way, interest rates are climbing. The majority of consumers can only afford to buy an asset with the help of a loan. You can repay these loans over up to 25 years in affordable Equated Monthly Instalments (EMIs). An EMI calculator can help estimate your monthly installments.
As a borrower, you must be aware of the many sorts of EMIs, such as pre-EMI and full-EMI.
What is full-EMI?
After the initial disbursement, you pay the entire EMI. The EMI is calculated based on the approved amount, not the disbursed amount. For example, you’ve set a restriction of Rs 50 lacs. You’ve taken out a loan for a property that’s still building. You’ve received payment for the first tranche of Rs 5 lacs.
You pay EMI based on the total Rs 50 lacs, even though the release amount is only Rs 5 lacs. According to an EMI calculator, the complete EMI for a loan of Rs 50 lacs over 20 years at 10% will be Rs 48,251.
So, even though the distribution is merely Rs 5 lacs, you pay this sum. Even for under-construction properties, you can choose Full EMI.
What does this imply?
Whether your loan is disbursed all at once is no distinction because the approved and paid amounts are the same. If the quantity disbursed is lesser, however, you will repay your loan considerably faster.
As a result, your overall interest expense will reduce. If you do not request disbursement for the entire sanctioned amount for any reason, the bank will keep adjusting the loan term.
For example, if you received the first disbursement of Rs 20 lacs and did not get any additional assignments, you would pay off your home loan in 52 months.
What is the advantage?
Because you’re paying both principal and interest on your loan, you’ll pay it off sooner. Furthermore, because the EMI gets based on the sanctioned amount and interest is only computed on the disbursed amount, the outstanding principal reduces considerably more quickly.
What is pre-EMI?
Borrowers can choose Pre EMI only if they are taking out a house loan for a property that is still getting built. Most borrowers pick this option since lenders only release part of the loan balance, and debtors only have to pay the interest portion of the loan, not the total EMI, until the entire loan amount gets disbursed.
Until then, there will be no principal repayment. You pay according to the usual amortization plan once the full loan amount gets disbursed. The bank may set a time limit for Pre-EMIs in some situations.
In other words, you can pay Pre-EMI for up to three years. Following that, full EMI will begin, and you can use an EMI calculator to understand the instalments.
What does this imply?
There is no distinction between Pre-EMI and Full EMI if your house loan is disbursed all at once. However, if payments get completed in instalments, there will be a significant difference. Continuing with the previous example, following the initial disbursement of Rs 5 lacs, you will pay a Pre-EMI of Rs 4,167 (Rs 5 lacs x 10% / 12).
If you take another withdrawal of Rs 10 lacs after six months, your EMI will rise to Rs 12,500 (Rs 15 lacs x 10% / 12).
What exactly are the problems?
The entire sum (before disbursement) gets used to pay off the interest. As you can see, a total of Rs 4 lacs gets spent on interest payments. Zero goes toward the loan’s principal.
Only in terms of absolute interest is there a difference. In both circumstances, the borrowing cost is the same. You pay higher interest because you remain on loan for a longer time with Pre-EMI.
What are the advantages?
It eases your financial strain by requiring you to pay interest only on the money that gets disbursed.
Difference between pre-EMI and full-EMI
The following principles will help you understand the difference between Pre-EMI and Full-EMI financing.
- Disbursement of loans differs: You can get the entire loan amount disbursed if you choose full EMI. However, if you decide pre-EMI, the loan amount only partially gets spent.
- The loan’s payback differs: In the case of pre-EMIs, the EMI amount you pay upfront is substantially smaller than in the case of full EMIs, where you must pay the whole EMI amount regardless of the loan amount disbursed.
- The interest rate is different: The interest rates for full EMIs get determined on the entire principal amount. The pre-EMI interest rate is determined using the loan amounts that get disbursed.
Pre-EMI is ideal for:
- Those seeking to invest money during the pre-EMI time in such a way that they receive a decent return on their investment
- The potential cost of the money you would have to pay as full EMI vs the money that could be saved and invested in a reputable savings scheme will help you decide which repayment method to choose.
- The pre-EMI option is also perfect for property investors who plan to sell the property after being built.
- Pre-EMI payment is the most excellent alternative for those waiting for a change in financial capability or who cannot afford to pay the entire EMI right now.
Full-EMI is ideal for:
- Those who want to pay off the loan before taking ownership of the property should choose full EMI payments.
- This alternative is also perfect for those who are concerned about building delays. It would imply paying the pre-EMI for a more extended period, increasing the overall cost of the loan.
Finally, the EMI is an essential part of a loan. As a result, you must comprehend pre and full EMI and the distinction between the two. It will assist you in making an informed loan application and repayment decision.
Frequently Asked Questions
There is no additional benefit to the repayment of the principal amount or interest payment before possession in the case of Pre-EMI. An interest amount of more than Rs. 2 lakh is paid between 3 and 7 years in both cases. The loan is paid back much faster through the Full-EMI option compared to the Pre-EMI option.
Full EMI is a term used in reference to the EMI amount paid by borrowers immediately after the lender disburses the principal loan amount.
This way your loan principal repayment starts and your unexpired tenure reduces too. Can the repayment mode be switched from Pre-EMI to EMI in the mid-term prior to possession? Yes, there is. We generally advise our clients not to wait till possession to start the EMI.
There is no right and wrong, both pre-EMI and Full-EMI are good way to repay the loan, however it depends on the borrower’s repayment capacity and ability to judge his financial commitments.