Factors to be Considered Before Choosing Pre-EMI Option

What is Pre-EMI?

Installments that are paid before the Estimated Monthly Installments (EMIs) are known as Pre-EMIs. EMI is estimated by calculating the principal amount and the interest amount. Nevertheless, Pre-EMI is the repayment of the interest on the loan amount which doesn't include the principal amount. Pre-EMIs are paid until the disbursement of the loan is complete. This option is applicable only for home loan borrowers. The Pre-EMI will end after the building is completed. EMI payments commence once the pre- EMI is paid. The pre-EMI payments do not influence the outstanding loan amount.

In the pre-EMI mode of repayment, the banking institution will disburse the loan amount at the construction stage of the building, and the interest amount will be paid in partial disbursements during the construction. After the construction is complete, the borrower will have to pay EMIs on the home loan regularly.

Pre-EMI Vs. EMI

Pre-EMI is repayment of interest on loan only, and EMI is the repayment of principal loan amount along with interest. When a home loan borrower prefers the pre-EMI mode of repayment, he/she will be required to pay the interest on the loan until the construction of the house is complete. Pre-EMI mode ensures lower outflow of cash relative to the regular EMI. This mode can also be chosen if the borrower does not have sufficient income capacity to handle the monthly EMIs.

Who can opt for the Pre-EMI option?

Borrowers who have cash flow problems and are not capable of repaying the loan EMIs at present can opt for the pre-EMI option. Customers don't have to wait until the entire loan amount is disbursed. He/she can start repaying the interest amount on loan through the Pre-EMI option. Customers can also prefer to switch from the Pre-EMI stage to the EMI stage midway. This can be done when 70% -75% of the loan has already been disbursed.

When to avail the Pre-EMI option?

You can select this option when your income-flow is limited and you won't be able to pay the EMI.

You can choose this scheme when you have an urgent credit requirement.

Since the Pre-EMIs are lower than EMIs, you can use the difference to make investments.

You can pay the Pre-EMIs to the lender if you are planning to sell the property after construction or a few years after the construction is complete.

Key points to reflect on before you choose to opt for Pre-EMI option

The Pre-EMI option is an additional benefit where the borrower can quickly repay the interest portion of the loan without affecting the loan amount and tenure. Therefore, this facility should be used wisely. Customers must keep these points in mind:

• Calculate the amount that you have to repay in the form of debt.
• Check whether you'll be able to handle other monthly expenses after paying the EMI.
• Analyze the purpose of the goods purchased by using the loan.
• Verify if there are any returns from the purchased good.
• For taking a home loan, consider whether you'll be staying in the property or selling it to someone after the completion of the construction.
• Calculate the opportunity cost that you were planning on saving if you hadn't been paying the EMI.
• Check and compare the investment returns.

Points to remember before choosing the Pre-EMI option

• The repayment of a loan amount begins after the loan has been disbursed. Amount paid off as Pre-EMI doesn't affect the loan amount or the tenure.
• Lenders sometimes consider the tenure in which you have paid the Pre-EMI due to which the remaining loan amount is spread over the rest of the tenure, thus increasing the amount of EMI paid each month.
• Ensure that your lender allows Pre-EMI. Some lender companies do not allow the borrower for Pre-EMI.
• The lender sometimes enrolls the customer mistakenly without checking whether the customer wants to avail that option. You must verify the loan application to make sure this problem doesn't arise.
• There are no tax-benefits when a borrower chooses to pay the interest amount to the lender.
• The customer will be required to pay the Pre-EMI for an extended period if there's a delay in possession of the item.