Pre-EMI refers to a payment scheme in which a borrower starts paying the interest component of a loan amount disbursed by a lender before the commencement of the actual Equated Monthly Installments (EMIs). This payment is usually applicable for home loans or property loans, where the loan amount is disbursed in parts or stages, instead of the entire amount at once.
In such cases, the borrower is required to pay only the interest component of the loan amount disbursed until the loan tenure commences. This is known as pre-EMI. The borrower continues to pay the pre-EMI until the full loan amount is disbursed, after which the actual EMI payment starts.
Here are 10 things you must know about home loan pre-EMIs:
Definition: Pre-EMI is a type of loan repayment scheme in which the borrower pays only the interest component of the loan amount disbursed until the loan tenure commences.
Purpose: Pre-EMI payments are made by borrowers who have availed of a partial disbursement of their loan amount and want to start repaying the interest component of the disbursed loan amount before the actual EMI payments start.
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Calculation: Pre-EMIs are calculated on a daily basis on the amount disbursed by the lender and the applicable interest rate. The borrower is required to pay the pre-EMI amount every month until the actual EMI payments start.
Amount: The amount of pre-EMI payments depends on the loan amount disbursed, interest rate, and the time gap between the disbursal of the loan amount and the commencement of the EMI payments.
Duration: The duration of pre-EMI payments depends on the time gap between the disbursal of the loan amount and the commencement of the EMI payments.
Interest: The interest component of the pre-EMI payments is usually lower than the EMI payments, as the pre-EMI payments are made only on the disbursed loan amount.
Tax Benefit: Pre-EMI payments do not offer any tax benefit to the borrower. The tax benefit can be availed of only when the actual EMI payments start.
Impact on Credit Score: Pre-EMI payments do not have any impact on the borrower’s credit score as long as the payments are made on time.
Prepayment: Pre-EMI payments cannot be considered as prepayment of the loan amount, as they do not reduce the principal amount of the loan.
Pre-EMI vs Full EMI: It is advisable to opt for full EMI payments if the borrower has the capacity to repay the entire loan amount. Pre-EMI payments can increase the overall cost of the loan as the borrower has to pay the interest component of the disbursed loan amount for a longer duration.
Adhil Shetty, CEO, Bankbazaar.com, says, “You can choose between a pre-EMI and a full EMI option when buying an under-construction property. In a pre-EMI plan, you need to pay only the interest on the disbursed amount till you get the possession of the property or at the end of the moratorium period (usually around 2-3 years), whichever earlier. On the other hand, in a full EMI option, you have to start paying the EMI immediately regardless of the bank disbursing the loan partially or completely. Under the full EMI option, the EMI is calculated on the entire loan amount and not on the amount disbursed by the bank until that time.”
“Apart from the above-mentioned EMI options, banks may also offer additional variations in home loan products; as such, you’ll be well-advised to inquire about different types of EMI options available with your preferred bank before finalising your lending decision,” adds Shetty.
If you are opting for a Pre-EMI scheme, there are certain things that you should check before signing up for it. Here are a few important things to keep in mind:
Interest Rate: Check the interest rate charged on the pre-EMI payments. Ensure that it is reasonable and within your budget.
Payment Frequency: Verify the frequency of pre-EMI payments. Ensure that the payment schedule is convenient for you and aligns with your income cycle.
Disbursement Schedule: Understand the disbursement schedule of the loan amount. Ensure that the lender disburses the loan amount as per the agreed schedule and there are no delays or discrepancies.
Check if the lender charges any prepayment penalties for making prepayments or repaying the loan before the actual EMI payments start. Opt for a scheme that offers flexible prepayment options. If you still have any doubts, you must feel free to clarify the same from the lender before you sign a loan agreement.