Advance EMI - How does it work?

[nvldvr]

I am planning to get a new set of wheels soon. Since i already have a car loan running with HDFC bank, they are offering me upto 7.5 lacs at 10% (monthly reducing, fixed).
My requirement is 5 Lacs, and the charges quoted are 2800 as processing fees, and 1500 as stamp duty. In addition, they will take EMI as advance.
Now i am not very clear about this advance EMI thing. Does it mean that the bank will take one emi in addition to the 36 EMIs that i am looking at?

[gpa]

My understanding of an advance EMI is as follows. Suppose you settle for a 13 month loan, then the advance EMI will count as month 1 and you will be left with 12 EMIs to clear.

[nvldvr]

I think there is more to it. In this case, the bank doesnt stand to gain anything. It just becomes the regular 1st EMI. Why call it advance EMI then?

[PraveenM]

Advance EMI and collecting EMI at the beginning of the month changes the effective rate of interest, but banks usually quote the interest rate as though EMI is collected at the end of the month. You can easily compute the effective rate in Excel using RATE function. Usually the difference is about 25-50 basis points or 0.25 to 0.5 %.

[gpa]

So does that mean that the "advance amount paid as an advance EMI" figures in the overall loan figure?

[amidoc]

Originally Posted by nvldvr

I am planning to get a new set of wheels soon. Since i already have a car loan running with HDFC bank, they are offering me upto 7.5 lacs at 10% (monthly reducing, fixed).
My requirement is 5 Lacs, and the charges quoted are 2800 as processing fees, and 1500 as stamp duty. In addition, they will take EMI as advance.
Now i am not very clear about this advance EMI thing. Does it mean that the bank will take one emi in addition to the 36 EMIs that i am looking at?

advance emi work likes this. Loan taken for Rs 7 lakhs. emi is say Rs 12 k for 5 yrs. the loan co disburses only Rs 6.88 l to the dealer (less other charges) and the advance emi is paid by you upfront to the dealer. Basically u are getting loan of Rs 6.88 l but paying int on Rs 7 L on a reducing balance basis.

[gpa]

^^Thanks amidoc for clarifying this. Makes sense for the bank when you take in to account what you have said.

Cheers,
gpa

[mobike008]

Originally Posted by amidoc

advance emi work likes this. Loan taken for Rs 7 lakhs. emi is say Rs 12 k for 5 yrs. the loan co disburses only Rs 6.88 l to the dealer (less other charges) and the advance emi is paid by you upfront to the dealer. Basically u are getting loan of Rs 6.88 l but paying int on Rs 7 L on a reducing balance basis.

This is the perfect explanation. Plus when you pay one EMI upfront, your interest percentage is automatically increased by atleast 0.5% to 1% basis points.

IMO, you should negotiate and not pay the upfront check. Goodluck !

[NetfreakBombay]

Originally Posted by nvldvr

I think there is more to it. In this case, the bank doesnt stand to gain anything. It just becomes the regular 1st EMI. Why call it advance EMI then?

There is a difference in this EMI payment as compared to other payments.

This EMI has Zero interest component.

So if your loan is 5 lakh and EMI is 10k, you would pay interest on 4.9 lakh.

Originally Posted by amidoc

Basically u are getting loan of Rs 6.88 l but paying int on Rs 7 L on a reducing balance basis.

Originally Posted by mobike008

when you pay one EMI upfront, your interest percentage is automatically increased by atleast 0.5% to 1% basis points.

That is not the case with advance EMI. This EMI is reduced from principal. So you pay interest on remaining amount of principal for duration of loan.

[nvldvr]

[/quote]That is not the case with advance EMI. This EMI is reduced from principal. So you pay interest on remaining amount of principal for duration of loan.[/quote]

I disagree. What amidoc says makes more sense. Infact i just clarified from the bank people regarding my case. For a loan of 5 lacs, EMI worked out @ 10% reducing for 36 months is 16k, and other charges 4300. So, after deducting 16k + 4300, the draft made to the dealer will be for 4,79,400. And i would pay 35 EMIs of 16k each after that.
So , in effect, the bank has charged me interest for 5 lacs, whereas the amount paid to the dealer or the loan imbursed is only 479700. Thats how the bank gains.

[nkrishnap]

Advance EMI will reduce the disbursement amount from the Bank, Say for example 1.5 lacs is the loan amount and 10K is the EMI. the advance EMI means, 1.5 lacs minus 10K, which is effectively 1.4 lacs is the amount that the bank is providing as loan. However the interested would be calculated on 1.5 Lacs.

[NetfreakBombay]

Originally Posted by amidoc

So , in effect, the bank has charged me interest for 5 lacs, whereas the amount paid to the dealer or the loan imbursed is only 479700. Thats how the bank gains.

There is a twist here:

1. Duration of Loan is reduced by 1 month
2. Amount of principal is reduced by 1 EMI

That results in saving of 5k in interest over 3 years.

Example with 5 lakh and 10% and 36 months:

(Note that it tallies with 16k EMI you mentioned in case of advance EMI)

[somebodystopme]

So you guys are trying to say If we borrow a loan for 5L and dont give advance EMI, Still then they will give us cheque for 479 or 480 and not complete 5L.
If the answer is no, they will give us cheque for 5L. Then how does it make a difference even if they give us cheque for 10 20K less and delearship is fine with it?

EDIT
Please correct me if am wrong
The main debate here is that when a bank takes advance EMI say for 5L they should be actually taking it for 4.83L and not 5L????