How Does the EMI Work in Different Loans?
Last Updated : Sept. 12, 2020, 11:38 a.m.
When applying for a loan, one often focuses on getting a lower rate of interest so that the overall outgo is reduced to the maximum extent. The outgo happens through Equated Monthly Installments (EMIs), a portion of both principal and interest payable towards a loan. The EMI quantum depends on the loan amount, interest rate and tenure. But there’s more to the EMI payment than just that. The working of the EMI may not remain the same across different loans. So, you should know about the working methodology of the EMI to reduce your outgo and enjoy a hassle-free loan journey. We will help you know about it in this post. So, keep reading!
On What Basis Does the EMI Differ Across Different Loans?
The EMI differs based on the type of interest rate charged on the loan, the moratorium (if allowed in a loan), etc. There are many loans such as personal loans and home loans, which you could be servicing or may take in the future. Let’s see how the EMI works across these loans without any further delay.
How Does the EMI Work in a Personal Loan?
Personal loan EMIs can be higher for you even if the interest rate offered is reasonable. You may ask, how? Well, the personal loan interest rate is of two types – flat and reducing balance. Assuming the same loan amount and interest rate, the flat rate leads to higher EMI compared to when the loan is offered on a reducing balance basis. In a flat-rate personal loan, the interest rate is charged on the principal loan amount. It does not consider the number of EMI payments you make. Whereas, when personal loans are offered on a reducing balance basis, the interest will be levied on the outstanding loan balance left after each EMI payment. This leads to lower EMI and interest outgo compared to when you get a flat rate from the lender. Let’s consider an example to understand it.
Example – Reena and Pallavi apply for a personal loan of INR 8 lakh for 5 years at two different lenders. Interestingly, both get the same rate of interest i.e. 15% per annum. But if Reena gets the loan on a flat rate basis and Pallavi grabs a reducing balance offer, how will the EMI vary for both of them? Let’s find out!
| Loan Aspects | Reena | Pallavi |
|---|---|---|
| EMI | INR 23,333 | INR 19,032 |
| Interest Outgo | INR 6,00,000 | INR 3,41,917 |
You could see Pallavi saving more than INR 4,000 in terms of EMI, INR 4,301 (23,333-19,032) to be precise. This further translates into reduction of interest payments worth INR 2,58,083 (6,00,000-3,41,917).
For Reena, the annual interest payment is calculated at 15% of INR 8 lakh, which comes out as INR 1,20,000. It got multiplied by 5 (the number of years for which the loan will run) to get a sum of INR 6,00,000. Then, the principal loan amount of INR 8 lakh and total interest outgo of INR 6 lakh get added to give a sum of INR 14 lakh, which is divided by the number of installments i.e 60 (5×12). This way, the EMI comes out as INR 23,333 (approx.). On the other hand, the EMI and interest outgo for Pallavi are calculated using the Personal Loan EMI Calculator of Wishfin.
Modus Operandi of Top-up Personal Loan EMI
A top-up personal loan can be given over the existing personal loan amount to meet your additional needs. So, when you apply for a top-up amount and get it from the lender, how will the EMI payment fare for you? Well, it will depend from one lender to another. While some lenders can tell you to pay a consolidated EMI, others will have separate EMIs. The consolidated EMI will most likely have the same interest rate on both the running loan and the top-up amount. The outstanding balance of the running loan amount and the top-up amount will add to give a resultant sum over which the interest rate will apply. In a consolidated EMI, the tenure for the top-up loan will most likely be for the time left in the existing personal loan.
How Does the Home Loan EMI Work for Borrowers?
Home loans are offered on both fixed and floating interest rates. Depending on what type you get, the EMI payment will vary. As a fixed rate implies the same rate of interest throughout the loan tenure, the repayment will not change. Whereas, a floating rate of interest means the home loan interest rate will change based on the changes made in the repo rate by the Reserve Bank of India (RBI) from time to time. The interest rate on a fixed rate home loan is generally 3-4% higher than what’s offered in a floating rate loan. This means the EMI will be higher in a fixed rate loan. But whatever home loan interest rate type – fixed and floating – you choose, you will pay the same EMI throughout the tenure unless you do a balance transfer or make a prepayment. Only the interest and principal portion of the EMI will change with the rate in floating home loan interest rates .
What Changes Can You See in the EMI When Doing a Home Loan Balance Transfer?
As home loans run for as long as 30 years, you get multiple opportunities to do a balance transfer and save on your interest payment. A home loan balance transfer means the transfer of the outstanding loan balance from the existing lender to another one at a lower rate of interest. When you do a balance transfer, the new lender offers you two EMI options – whether to continue with the same EMI or go for a reduced one. You can choose either of the two to reduce interest payments. But when you choose the same EMI option, the interest payment reduces more. The reason being the tenure gets reduced and results in lesser interest outgo. Maybe an example will help you understand this better.
Example – You availed a home loan of INR 50 lakh for 20 years around 3 years ago at 8.70% per annum. Now, you get a balance transfer facility at 7.95% per annum based on your repayment track. What will be the repayment across the two EMI options after doing a balance transfer? Let’s find out in the table below.
| Loan Aspects | Repayment Estimates with the Same EMI Payment (In INR) | Repayment Estimates with a Lower EMI Payment (In INR) |
|---|---|---|
| EMI on INR 50 Lakh at 8.70% | 44,026 | 44,026 |
| Interest Payable at 8.70% for 20 Years | 55,66,275 | 55,66,275 |
| Interest Paid Till 3 Years | 12,66,382 | 12,66,382 |
| Outstanding Loan Balance After 3 Years | 46,81,439 | 46,81,439 |
| EMI Payable at 7.95% Post Balance Transfer | 44,026 | 41,912 |
| Interest Payable at 7.95% Post Balance Transfer | 34,54,487 | 38,68,606 |
| Interest Paid at 8.70% + Interest Payable at 7.95% | 47,20,869 | 51,34,988 |
| Savings on a Balance Transfer | 8,45,406 (55,66,275-47,20,869) | 4,31,287 (55,66,275-51,34,988) |
You could see more savings when you pay the same EMI after doing a balance transfer. Doing this will help you reduce your loan tenure to about 185 months (15 years and 5 months) after doing a balance transfer. The overall tenure thus reduces to 18 years and 5 months by keeping the same EMI.
How Will the EMI Work in a Home Loan Part Payment?
Like you can get multiple opportunities to do a balance transfer, you can also make a part payment of the home loan more than once if you save enough. Similar to a balance transfer, you get two EMI payment options at the time of part payment. Here also, you will benefit more. An example below will help you understand better.
Example – You take a home loan of INR 50 lakh for 20 years at an interest rate of 7.80% per annum. Say after 7 years, you make a part payment of INR 5 lakh using your savings. How will the EMI fare in each of the two options? Let’s check out!
| Loan Aspects | Repayment Estimates with the Same EMI Payment (In INR) | Repayment Estimates with a Lower EMI Payment (In INR) |
|---|---|---|
| EMI Payable @7.80% | 41,202 | 41,202 |
| Interest Payable @7.80% for 20 Years | 48,88,432 | 48,88,432 |
| Interest to be Paid @7.80% for 7 Years | 24,92,660 | 24,92,660 |
| Outstanding Balance After 7 Years | 40,31,708 | 40,31,708 |
| Part Payment Amount | 5,00,000 | 5,00,000 |
| Outstanding Balance After Paying the Part Payment Amount | 35,31,708 | 35,31,708 |
| EMI Payable Post Part Payment | 41,202 | 36,092 |
| Interest Payable Post Part Payment | 16,52,329 | 20,98,673 |
| Interest to be Paid for 7 Years + Interest Payable Post Part Payment | 41,44,989 | 45,91,333 |
| Savings on a Part Payment | 7,43,443 (48,88,432-41,44,989) | 2,97,099 (48,88,432-45,91,333) |
Making the same EMI payment after doing a part payment will have more savings for you as shown in the table above. The same EMI payment will ensure the loan gets paid off in 126 months (10 years and 6 months) after making the part payment.
What is this Pre-Interest EMI on a Home Loan All About?
A home loan is taken to buy not only a ready-to-home property but also an under-construction property. In an under-construction property, the loan is disbursed in tranches. Here, the EMI payment will constitute only the interest portion and not the principal amount. The principal payment will begin once you get the possession of the house.
How Does the EMI Work in an Education Loan?
Students looking to study in India or overseas can take education loans from banks or NBFCs at attractive interest rates. The education loan repayment begins 6-12 months after the completion of the course. It is called a moratorium period. However, you are allowed to make interest payments during the said period. If you make interest payments, the loan will come at a lower rate of interest once the usual EMI payment of education loan begins.