Advance EMI - How does it work?

nvldvr · 1st September 2009, 12:18

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 · 1st September 2009, 12:21

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 · 1st September 2009, 12:28

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 · 1st September 2009, 12:28

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 · 1st September 2009, 12:32

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

amidoc · 1st September 2009, 13:53

Quote:

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 · 1st September 2009, 14:47

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

Cheers,
gpa

mobike008 · 1st September 2009, 14:53

Quote:

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 · 1st September 2009, 15:07

Quote:

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.

Quote:

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.

Quote:

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 · 1st September 2009, 16:59

[/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 · 1st September 2009, 17:07

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 · 1st September 2009, 17:26

Quote:

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:

Duration of Loan is reduced by 1 month
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)

Advance EMI - How does it work?-comparison_emi.jpg

somebodystopme · 1st October 2009, 21:29

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????

1st September 2009, 12:18	#1
nvldvr BHPian Join Date: Apr 2009 Location: New Delhi Posts: 599 Thanked: 767 Times	Advance EMI - How does it work? 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?
	() Thanks

1st September 2009, 12:21	#2
gpa Senior - BHPian Join Date: Aug 2008 Location: Bangalore Posts: 1,789 Thanked: 340 Times	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.
	() Thanks

1st September 2009, 12:28	#3
nvldvr BHPian Join Date: Apr 2009 Location: New Delhi Posts: 599 Thanked: 767 Times	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?
	() Thanks

1st September 2009, 12:28	#4
PraveenM BHPian Join Date: Apr 2007 Location: Chennai Posts: 125 Thanked: 32 Times	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 %.
	() Thanks

1st September 2009, 12:32	#5
gpa Senior - BHPian Join Date: Aug 2008 Location: Bangalore Posts: 1,789 Thanked: 340 Times	So does that mean that the "advance amount paid as an advance EMI" figures in the overall loan figure?
	() Thanks

1st September 2009, 14:47	#7
gpa Senior - BHPian Join Date: Aug 2008 Location: Bangalore Posts: 1,789 Thanked: 340 Times	^^Thanks amidoc for clarifying this. Makes sense for the bank when you take in to account what you have said. Cheers, gpa
	() Thanks

1st September 2009, 16:59	#10
nvldvr BHPian Join Date: Apr 2009 Location: New Delhi Posts: 599 Thanked: 767 Times	[/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.
	() Thanks

1st September 2009, 17:07	#11
nkrishnap Distinguished - BHPian Join Date: May 2006 Location: Bangalore Posts: 3,983 Thanked: 7,407 Times View My Garage	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.
	() Thanks

1st October 2009, 21:29	#13
somebodystopme BHPian Join Date: Nov 2005 Location: Delhi Posts: 519 Thanked: 43 Times View My Garage	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???? Last edited by somebodystopme : 1st October 2009 at 21:32.
	(1) Thanks