EMI is a concept that has emerged to make people buy what they wish for without much of waiting. Like a coin has both sides, EMI concept also has both advantages and disadvantages. What you should be aware of is, it is not a free meal but needs a lot of research and understanding while making a choice between Pre-EMI and Full EMI as a mode of home loan repayment.
What is EMI?
EMI or Equated Monthly Instalment is when the borrower starts repaying the principal amount from day one. This means they start chipping away the loan amount leaving a little amount to be repaid after the construction and possession of the property.
- First in the list, it allows you to buy what you wish/desire for.
- It gives you an option to decide the amount you want to pay in EMI and tenure for it
- It helps in reducing the tax burden
- Easy on wallet as you make the payment in parts.
Disadvantages of EMI
- It’s a long-term debt.
- When you calculate the amount you pay to the lender, it is more than the double the value of the property.
- The interest rate keeps changing and you should have a constant check on it.
What is Pre –EMI?
The EMI is comprised of the Principal amount and the interest rate. The Pre-EMI is the interest portion of the disbursed loan amount and is paid until the full dispersal of the loan amount, which in simple words means, paying in portions. Pre-EMI is an option out there for any under-construction property. The loan amount is released according to the stages of completion of the construction. Hence, you need to pay the loan accordingly. Which means the EMI is calculated only on the disbursed loan amount and not on the full loan amount.. In a way, it lowers the burden of the pocket.
For instance, you have taken a loan of amount Rs.20 lakh and Rs.4 lakh is disbursed first as a part of your Pre-EMI scheme then the EMI is calculated on Rs.4 lakh which is considered as interest but not as principal repayment. The actual principal loan repayment starts when the loan amount of Rs.20 lakh is disbursed.
- No need to pay EMI while the property is getting constructed.(If you choose no pre-emi option).
- Customers are free from price appreciation which during construction period can go up to Rs.500 per sq ft. by the end of project completion.
- Boon for salaried people as it doesn’t burn a hole in their pocket
- When a builder wants working capital during the construction process, he offers the no pre-emi scheme, which means it is your market and try to grab a best offer.
- Cross verification is important as the property might be disputed one
- Watch for delayed construction and possession period
- Builder often charges some extra amount of Rs.200-300 per sq.ft.
- Any principal prepaid by a person before he/she gets the possession of the property is not deductible under Income Tax Act. This wipes the benefit of Section 80 C which allows the deduction of a maximum of Rs.1, 50,000 lakh.
Comparative Analysis of Pre-EMI and Full EMI
Both the EMIs have the best to offer and meet different needs of a different section of people. For example, pre-EMI works the best for salaried people or for those who are living in rented apartment so as to manage both the rent and EMI. But at the same time full EMI saves a lot of time and helps to pay off the loan in the defined time period. So, how to decide which scheme will be the best for you?
Here are some key determining factors while choosing either of the two options:
|If you want to get the tax benefits||If you have low cash flow at the time you decide to buy a house|
|If you want to be debt-free early||If you had taken the property as investment and reselling is an option you look after the completion of the project.|
|If the project time-line is too far and if it dealys the repayment of principal loan amount.||If you are able to invest the difference amount of EMI and pre-EMI , such that the returns are higher and will help you easily to pay the principal amount when the actual loan starts.|
|If the active investment doesn’t appear feasible||If your money has to be used for some other immediate and urgent needs.|
Cross-check your need and requirement with the above mentioned points and whichever payment fits better in your pocket, go ahead with that.
You can also consult Loanyantra for your home loan need. Our dedicated team of professionals thoroughly analyse your loan requirement and your financial portfolio before suggesting you an option. Loanyantra is an easy way where you handover us your requirement and we will give the right answer to your query. Get connected with us to know more about our services.