Pre-EMIs might look like the attractive cousin in the otherwise off-putting family of financial liabilities known as equated monthly instalments. Equated monthly instalments or EMIs are the most common loan repayment procedures where you make monthly payments to the lender against a big loan. These payments include interest as well as part of the principal amount. In most cases, the ratio according to which the payment is split towards interest and principal is outlined in a document called an amortisation schedule; the portion of interest decreases over time while that of the principal increases.
For the longest time, there were no two ways about making loan repayments, especially on large loans like those taken for the purposes of buying homes or real estate. However, the ever busy financial pundits have come up with a new product: the pre-EMI.
Pre-EMIs are offered on home loans where the home is still under construction and not fit for possession. On the face of it, pre-EMI looks quite attractive. When you opt for pre-EMI, you only pay the interest on the amount that the lender has disbursed until that point. It is only after you take possession of your home are you required to make payments towards the principal loan amount.
Consider this: when you opt for pre-EMI, the payments you make go towards paying off the interest that has accrued on the loan amount that has already been disbursed. When further funds are disbursed, your EMI goes up accordingly. Your principal amount does not reduce. When you take possession of your house, you need to make payments on the entire principal amount you were loaned. Because you are not making any contributions towards your principal, your monthly contributions remain low compared to the regular full-EMI option.
As a borrower, your top priority must always be to pay off your debt as soon as possible while at the same time maintaining your present standard of living. Therefore, it makes significant financial sense in paying full EMI where your payments are split towards both the interest and the principal; this way, your principal amount keeps reducing from the day you start making payments. Pre-EMI payments are also not tax deductible.
However, if you do not have the capability to afford to pay full-EMIs from the beginning, you might opt for the pre-EMI option. You might already be paying rent and therefore are strapped for cash. This is possibly the only scenario in which case it is preferable to opt for pre-EMI because you do not reduce your principal amount until you take possession. Other exceptions include situations if you are buying the property to sell it as soon as it is completed; in this case, it makes sense to go for pre-EMI since you need to make only interest payments and upon the sale of the property, you can pay off the principal in a lump sum.
If you can afford to, you should opt for a full-EMI payment plan. It reduces your principal as well as the unexpired tenure.