Home loans top the segment of secured loan business of the banks. The EMIs option further makes it easier for the loan borrower to purchase his dream home. EMIs help to take away the burden of paying upfront the huge cost of the house. It is the fixed amount of money that the loan borrower needs to pay per month in order to take the loan of the desired amount.
The banks and NBFC provide home loan on interest which is called as the home loan rate of interest. The home loan borrower repays the loan and its interest at a equally divided monthly instalments of the loan tenure and therefore the word EMI derived its meaning which means “Equated Monthly Instalments”.
The benefit of an EMI for the loan borrower is that he precisely know how much money he needs to pay toward his loan per month and therefore it makes his personal budgeting process easier.
The EMI depends upon following three important factors:
1) Borrowed principal amount.
2) Rate of interest.
3) Loan tenure.
Loan interest is either charged on the full amount for all EMIs or on reduced or outstanding principal amount. Accordingly the EMI will be fixed or will fluctuate with the fluctuations in the rate of interest. Since the EMI is the combination of principal amount and interest component, the first EMI always includes the higher interest part and the lowest principal component. With every subsequent EMI, the interest component keeps on reducing while the principal component increases.
At times a borrower may choose to make partial payment towards his loan amount. Under such scenario the bank may either alter the loan tenure for the borrower or reduce the subsequent EMIs as bank may charge interest only on the balance outstanding amount while retaining the loan tenure. The EMI amount may vary depending on the number of prepayments done to the loan account. However if the borrower skips any EMI due to insufficient balance in case of auto deduction of EMI / cheque bounce, apart from being penalized, the bank may either increase the subsequent EMIs for the loan borrower or may choose to increase his loan tenure.
The home loan EMI starts only after the disbursement of the home loan. Every bank has the EMI date which happens to be either the 1st, 5th or 10th of every month. The loan borrower has the liberty to choose among the EMI dates. A home loan disbursed on any other date other than the EMI dates, a loan borrower need to pay a pre EMI for till such period. The pre EMI means the loan borrower will pay only the interest amount on the loan borrowed from the bank. For example if the home loan is disbursed on 28th of the month and EMI date is 5th of the month, the loan borrower will pay pre EMI from 28th – 5th.
Conclusion: Though most of them afford their dream home only after paying the bitter equated monthly instalment, but with the increase in the interest rates and higher home cost, the EMI further bites on a major part of the income of the loan borrowers.