Consider that a newly married couple wants to purchase their first home in Nagpur. Since they are both working professionals, this couple can take advantage of a home loan. Further, they will face the option of repaying their loan wherein the decision factor remains on whether to opt for a Pre EMI vs. Full EMI. If the couple opts to invest in a newly developing property in Nagpur, then it is assumed that the property will not be ready for possession until 3-4 years of availing the home loan. Also, home loan interest rates within the market are always fluctuating which impacts the total amount of the loan. Therefore it is also imperative to understand the difference between Pre EMI and Full EMI at this point.

Let us explore how to make a choice when it comes to paying the loan sum in full equal monthly installments or through pre EMIs.

What is a full EMI?

In this option, the EMI is calculated solely based on the total loan amount. This is a fixed EMI scheme which will ensure that you repay the loan in a fixed period of time, say 20 years, no matter what the time taken for your project to be completed is. The delays in taking possession of your property have nothing to do with the payment of your loan EMI. Even though this EMI may start early, the good news is that the loan will also be repaid early!

What is pre EMI?

In the pre EMI method, you only have to pay the interest on the loan amount as long as, say, the construction of your home is ongoing. When it is complete, you can start repaying the actual loan amount. At first glance, pre-EMI sounds like the best EMI option and a less expensive way of repaying a loan. But there’s more than what meets the eye. In case of pre EMI, suppose the construction of your house takes 5 years to complete and your tenure is 25 years, then for the first 5 years you have to pay the interest on the loan. But for the next 25 years, you will be paying the loan amount. Hence, effectively, you will be repaying the loan for 30 years. Also, if the project is prolonged for more than 5 years, the tenure would increase as well, keeping you in debt for that period.

Let us see the difference between the two EMIs:

When it comes to calculating a home loan EMI, the methods differ for both. In case of full EMI payment, the EMI is calculated on the total sum amount that is loaned. While for pre EMI, the interest is calculated only on the amount that is disbursed. For instance, if the loan is a total of Rs. 20 lakh, and you receive 5 lakh at first, then you only have to pay the interest on Rs. 5 lakh. The real repayment of the loan starts once you have been disbursed the entire amount of Rs. 20 lakh.

Now that we have understood the difference between the two options, we must consider the interest rates and tax benefits associated with both options. While, one must do their homework on pre EMI interest rates and full EMI interest rates, both options are entitled to similar treatment when it comes to tax benefits i.e. neither will be entitled to a tax deduction.

So which is the best option? Considering all factors, it depends on your opportunity cost of cash used for payment. Here is a brief summary of what your options are:

  1. Taking a loan under the full EMI scheme is quite advantageous in the long run as you start repaying the loan from day one. This can, however, be quite tricky if your project gets extended, and you might inevitably end up paying more than what you loaned in the first place, resulting in loss.
  2. From an investment perspective, in the pre EMI method, you can invest the loaned money and the returns on this money can be used to repay the loan.

A good lending institution or bank will prepare you for what is to come in the future with regards to Full EMI vs. Pre EMI. Bajaj Finserv, a leading online lender helps with home loan applications and flexible repayment options.

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