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Understanding ‘ EMI in Arrears ’ vs ‘ EMI in Advance ’

Understanding ‘ EMI in Arrears ’ vs ‘ EMI in Advance ’

The simplest way to assess the affordability of the loan is to look at the EMI. The lower the EMI, the more affordable the loan is. Because that’s the hard cash you must pay every month. The EMI depends on the loan quantum, the loan term, and the interest rate. And you can tweak these figures to increase your affordability. For case, the EMI size goes down with an increase in the loan term. Everything additional being the same, you would go with a lower EMI. Makes sense too.

still, a lower EMI may not always mean a lower rate of interest. Indeed with the same loan quantum and the loan term. How is that possible?
Let’s consider 2 loans.

Loan Rs 10 lacs, Interest Rate 10, Loan Tenure 5 times\

  • Loan1 EMI Rs 21,247 per month
  • Loan2 EMI Rs 21,071 per month

Everything is the same but the EMI is different. How?

EMI in Arrears vs EMI in Advance
Loan1 is EMI in Arrears.
Loan2 is EMI in Advance.
What’s the difference?
EMI in Arrears is the standard EMI product, the bone you generally encounter. You pay your first EMI after a month( or on a specified date).
EMI in Advance requires you to pay the first EMI at the time of disbursal. In fact, it’s acclimated with the expended quantum. That, in a way, reduces the factual loan quantum. Since the first EMI is paid at the time of disbursal, the first EMI is only top prepayment( and no interest payment). This scheme is generally used with auto loans.

The cost of the loan remains the same under both EMI modes. Yes, that’s right. In the below illustration, it’s 10 sire
Indeed though the cash overflows are slightly different in the two cases, the cost of the loan will still be the same. still, there can be minor differences if there are ancillary charges similar to the recycling figure.
How to Calculate These Two EMIs?
You can use the Excel function( PMT) to find the EMI.
PMT( Yearly Interest Rate, No. of inaugurations, Loan quantum, 0, Arrears Advance)
For EMI in Arrears, use 0 in the final argument. For EMI in Advance, use 1. It’s that simple.

Loan quantum = 10 lacs, Interest Rate 10 sire, Loan term = 5 times = 60 months

  • EMI in Arrears = PMT( 10 ÷ 12, 60, 10 lacs, 0, 0) = Rs 21,247 per month
  • EMI in Advance = PMT( 10 ÷ 12, 60, 10 lacs, 0, 1) = Rs 21,071 per month

still, you can try our calculator, If you aren’t comfortable with spreadsheet software.
EMI in advance is lower. So, is it more or cheaper than EMI in Arrears? No, it’s not. EMI in Advance is lower simply because the net loan quantum is lower. In this illustration, the net loan is Rs 10 lacs – Rs 21,071 = Rs 9.79 lacs.
Then’s some intriguing math. However, 071) and also calculate the EMI in Arrears using the PMT formula, you’ll get the same number( Rs 21 If you reduce the loan quantum( Rs 10 lacs) by EMI in Advance( 21. Loan = Rs 10 lacs – Rs 21, 071 = Rs.9.79 lacs
Now, calculate EMI in arrears for 1 lower month of the term.
PMT( 10 ÷ 12, 59,9.79 lacs, 0, 0) = Rs 21,071( this was the EMI in advance).

Hence, the difference is simply because of the net loan quantum. EMI in Advance is the same as EMI in Arrears loan of Rs9.79 lacs for a term of 59 months at 10 sire
Impact of Processing Fee and Other Ancillary Charges
With EMI in Advance, the net loan quantum is lower. thus, any fixed cost similar to the recycling figure will be spread over a lower quantum. therefore, any similar cost will increase the cost more for EMI in Advance. But the impact will be minor unless a similar fixed charge( as of loan quantum) is high.
Let us understand this with the help of an illustration.

Loan quantum = 10 lacs, Interest Rate 10 sire, Loan term = 5 times( 60 months)

Processing Fee Rs 5,000

  • Net cost EMI in Advance10.22 sire
  • Net cost EMI in Arrears10.21 sire

Processing Fee Rs 10,000

  • Net cost EMI in Advance10.45
  • Net cost EMI in Arrears10.43

Processing Fee Rs 20,000

  • Net cost EMI in Advance10.91 sire
  • Net cost EMI in Arrears10.88 sire

As you can see, the impact isn’t veritably significant.
The impact will also depend on the loan term. Shorter the term, the lesser the impact.

How Should You Consider This Information?

We’ve seen that the difference isn’t important, and this seems more like an academic exercise. still, you must still be apprehensive.
What if the bank quoted you an EMI of 21,247( same as EMI in Arrears) but it happen to be an EMI in the advance loan?
Your net cost would be further than 10 sire
Hence, lenders can show you a lower EMI by playing these minor tricks. As a borrower, you must understand the loan structure and calculate each- by cost( processing figure, interest rate, other charges).
A loan Is a Contract. You Can Word It in Any Manner
Now, it isn’t written anywhere that only 1 EMI must be paid in advance. For case, in the same illustration, the lender can collect 3 EMIs in advance and the borrower must repay the loan in the coming 57 yearly inaugurations.
In such a case, the EMI would only be Rs 20,735. The same interest rate of 10 sires
still, if the lender were to offer you an EMI of Rs 21,247( as was in EMI under Arrears) but charged 3 inaugurations outspoken, your net cost of the loan would be11.1 sire( and not 10 sires)
therefore, a bit of spreadsheet knowledge is always useful.

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