An Equated Monthly Instalment (EMI) is a fixed monthly payment made by a borrower to a lender to repay a loan over a specified period. EMI consists of both principal and interest components.
EMI is a crucial aspect of loan repayment, offering structured and predictable payments that help borrowers manage their finances effectively while repaying their loans. The flexibility in EMI structures allows borrowers to choose repayment plans that best suit their financial situation and future income expectations.
Also Read: Missed Home Loan EMI? Must Know What Happens Next
Key Components of EMI:
Principal Amount:
This is the original sum of money borrowed from the lender.
Interest:
The cost of borrowing the principal amount is typically expressed as an annual percentage rate (APR).
This article delves into the key difference between advanced EMI and arrears EMI.
The core difference lies in when you make the first EMI payment and how it affects the loan amount and interest.
EMI Payment Timing: This refers to whether the EMI is paid in advance or arrears:
In advance EMI, the borrower pays the EMI at the beginning of the month. This reduces the outstanding loan amount and the interest accrued thereon for the subsequent month.
On the other hand, EMI in arrears is the more common option where the EMI is paid at the end of the month.
Let’s understand in detail;
Advance EMI:
First Payment: You pay the first EMI upfront, at the time of loan disbursal. This initial payment typically consists only of the principal amount.
Benefit: Since you’re paying off some principal right away, the total loan amount you owe is reduced. This translates to lower overall interest paid throughout the loan tenure.
However, it must be noted that it requires a larger initial payment, which may not be feasible for everyone. Additionally, the interest rate for advanced EMI options might be slightly higher compared to arrears EMI.
Arrears EMI (Standard EMI):
First Payment: You start making EMI payments at the end of the first month after loan disbursal. The first EMI includes both principal and interest.
Benefit: Lower initial payment compared to advanced EMI. You might also find a slightly lower interest rate offered for arrears EMI.
In this, you end up paying more interest overall as you’re not reducing the principal amount upfront.
EMI In Advance vs EMI In Arrears, Which Is Better?
Choosing Between Advance and Arrears EMI:
- If you have the funds for a larger down payment and want to save money on interest in the long run, advance EMI might be a good option.
- If you need to keep your initial outlay low and are comfortable with slightly higher interest payments, arrears EMI is the more common choice.
- It’s always wise to compare loan offers from different lenders and understand the specific terms for both advance and arrears EMI options before making a decision.
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