EMI (Equated Monthly Installment) is a smart option that you will often find with different kind of loans. It is a fixed payment amount, which is given by a borrower to a lender at a particular date of every month. In EMI, there are two options open for you. One of them is Pre-EMI and the other one is Full EMI. As a matter of fact, banks prefer you to pay Pre-EMI. On the other hand, you will find that the CA (Chartered Accountant) firms and the accountants will suggest you to go for the Full EMI. A detailed understanding about both the EMI structure will help you understand the difference very well.
Pre-EMI
Pre – EMI is not the whole principal amount but the interest which has to be paid every month till the total amount is disbursed. The basic EMI payments begin after the Pre-EMI phase. In case some one has cash flow issues, they can opt for the Pre-EMI option and yet have an investment done and a property in their name without any hassle.
Full EMI
In case of Full EMI, you can pay the full interest amount at once. There are two benefits one can make out of it. The first one is the minimization of the tenure of the Loan Repayment. The second help will be the reduction in the total amount you repay. This is the reason, the Financial Consultants suggest you to pay the Full EMI, if there is ample cash with you. Banks discourage account holders to pay Full EMI, since that will slow down the interest earned on their side, but it is really beneficial for any one. The difference that is created due to Full EMI payment is really less.
Banks Prefer Pre-EMI
You will often be shown a big discrepancy by the bankers for paying Full EMI. You will have to pay more taxes with the Full EMI payment – This will be shown to you. If you calculate the full amount and begin to find out the difference between the two amounts, you will find that the tax reduction amount and the extra amount that you pay in Pre-EMI possess a big difference. However, for paying the full EMI, you need to have that cash in your bank account.
Formalities With Banks For Pre-EMI
The procedure for the Pre-EMI Option will require few documents and other formalities. Here are just the things that you need to look for –
Documentation
Documentation part is the biggest part that you will have to settle with the banks. The first thing that the bank might ask from you is the legal documents that proof that you own the house. Other than that, in support of the legal documents, the bank will ensure your identity as well. Who you are and whether you are capable to repay the loan – the bank will have to ensure that. So, they will ask for your identity and KYC. Your salary slip, in case you are a salaried person, or balance sheet, if you are a business man – these two are the documents that are required as proofs, you have the capability to repay the loan. With this document, banks will start designing the loan structure and the interest rates.
Interest Calculation
There are two types of interest calculation. The first option is to get through the fixed interest rate, that bank fixes and another one is the interest that will be calculated on the residual principal amount. The second one is stated to be the reducing monthly interest. After you pay the interests every month, the principal amount will be paid too. So, the left principal amount will become less. The interest will be calculated on the left principal value. Thus, the total amount you will pay as EMI to the banks will reduce every month.
Security
In most cases, the your property is kept as mortgage. This is treated to be the security for having the loan. However, this can be replaced by other collateral securities too. They can be a life insurance policy, the sum assured value of which will be the security value. The KVP (Kisan Vikas Patra) or NSC (National Savings Certificate) that are yet not matured can also be treated to be a security by the banks.
In all cases, one thing must be done by you. Try to invest more time for the loan. Do your research, either on the websites or by going to the banks. Clear out your concepts and make things as you need. You must not rely fully on anything or any media. There are some of the things that are to be checked too. Collect all the tax papers and certificates from the bank. Make sure that the documents, you get from the banks are not the colour photocopies. Just consult about all the details with your consultant and then go ahead with any decisions.
