Buying products or taking a loan for buying a car or home on EMIs may be a good option, but there are a few key issues that need to be kept in mind before opting for one. SHAlINI SAKSENA speaks to experts who tell you that the catch lies in the fact that some customers fail to understand that the longer the loan duration, the higher the interest amount he will pay
This is the age of Equated Monthly Instalment (EMI) EMIs. Almost all of us buy things on EMIs, they are easy to avail and affordable. But there are very few people who actually calculate the EMI that one should be paying. Take an example of the common norm that most people follow while buying a car on EMI. One enters the showroom, gives the representative the figure of the down payment and the amount of loan they want with the tenure period. The representative rattles off the rate of interest and after a few punches on the calculator arrives at the EMI.
However, industry experts say that one should not be so trusting when it comes to EMIs. That one must keep a few points in mind while opting for the EMI. “Never get in the trap of lower EMIs. Whenever one goes for low EMIs the duration increases which means in the long run one will end up paying a lot more interest to the banks. This is a fact which banks don’t tell you,” Abhishek Dwivedi Anti-Money laundering consultant helping large financial institutions implement standardised and production AMl solutions at global level explains.
He also says that one must check what the financial situation and try to increase the EMI as much as possible. “If your financial situation changes and you can’t afford high EMI, change your EMI to a lower value. A bank should allow the customers to change EMI as and when required. While choosing a bank make sure that the bank confirms such flexibility,” Dwivedi says adding that increasing or decreasing an EMI is not allowed if the remaining duration is only a year.
But despite a few catches, going for an EMI is a better option than doing part-payment. This is because under certain circumstances an EMI works to the person’s advantage. For example, on a loan of Rs20 lakh for 20 years with a interest 11 per cent if one just increases the EMI by Rs2,000 per month, one can save a total of over Rs8 lakh in the long run on the interest you pay to the bank. If one were to save this Rs2,000 for a year, meaning 12 x Rs2,000 = Rs24,000 and pay it as part-payment after a year, one can only save Rs1.62 lakh on interest.
It is not just the saving aspect that must be kept in mind. One also has to keep in mind that initially, the interest is higher, since more principal is outstanding. In the later years, the principal getting repaid starts increasing and interest drops. Then there is pre-EMI and zero per cent interest on EMIs. Zero per cent interest is mostly applicable on small household items. These have a rider clause like one to two per cent processing fee (for a Rs12,000 product one will pay Rs1,200-Rs2,400 processing fee). “The fact that one will pay some amount in advance means that Rs12,000 will not get divided into EMI. One needs to pay the first two to three months together and then pay the EMI. Nothing comes for free. Always remember to read the fine print of such zero per cent schemes,” Dwivedi cautions.
Dwivedi, who has recently released an Android App for mobile phones called EMI Expert lite where users can benefit from the tips, is quick to point out that the only hidden rider on an EMI is the failure of customers to understand that for a longer duration loan they pay very less principal component for the first few years. Banks generally don’t tell you this part and even if they do, they do not advise to increase EMI or lower duration which means one pays far more principal component,” Dwivedi says.
As for the pre-EMI, Dwivedi tells you that no builder is going to deliver the apartment on the due date, there will be delays. The customer should always remember the golden rule for a loan — always try to reduce the interest component as much as possible. In pre-EMI one is only paying interest component whereas the priority should always be to pay off the principal component as soon as possible.