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Originally Posted by gt_bhp  I'd like to understand the difference between an advance EMI and EMI in arrears. Which of these is advantageous to the user ?
Ex: For a loan of 5 Lakhs@9.5% for 36 months, I've been quoted EMI values of 15900 (1 Adv EMI) and 16030(without advance EMI).
From the various online calculators,I get the rate to be 9.56% when EMI is 16030. But I'm not able to understand how the EMI is calculated when 1 EMI is paid in advance. Would be of great help if someone can explain this to me. |
Let me try to take a shot at explaining this.
Recently, I also got to face this muddle and had a bad experience with Kotak. The guy quoted me an EMI for 6950/- for 36 months on an advance basis+35 PDCs of the same amount. This means that your first EMI is a cheque dated the day you sign the loan agreement. Also, assuming you applied for a loan of Rs 200,000/- (like in my case), you will be disbursed an amount of INR 200,000 - INR 6950 (advance EMI) - processing charges, which came to about INR 190,000.
What this means is that
1. You part with INR 6950 right away
2. You get a loan of INR 10k less than you applied for (meaning you put in additional amount as DP)
3. Your interest payment starts immediately, and that too on a loan amount of INR 200,000, whereas the actual disbursed amount is INR 190,000
As against this, in the arrear EMI option, your EMI starts the next month from the month of loan disbursement. e.g., I got my loan disbursement on Jan 15th and my first EMI will be deducted on Feb 10th.
You also get (almost) the complete amount of loan you applied for e.g. INR 200,000 - processing charges (unavoidable!). Hence, in arrears option, you will give all 36 cheques in PDC format
Technically speaking, the interest component of the loan is more or less the same in both options (higher by 3-4k over a 36 months period in case of arrear EMI option). However, the concept of time value of money kicks in here.
In Advance EMI case, you have to part with a larger sum of money upfront (1 advance EMI+Shortfall in loan amount disbursed), whereas in Arrear EMI option, you can spread your payments evenly and do not have to part with the same amount upfront.