Pre EMI vs full EMI

Pre-EMI and Full EMI: meanings and differences

Buying a house through savings is almost impossible today. Property rates are rising every day, and how! The only way in which most people can buy property is through home loans. These loans can be repaid in affordable Equated Monthly Instalments (EMIs) over tenures lasting up to 25 years. As a borrower, you need to understand the different types of EMIs – pre EMI vs full EMI. Read on to know more.

Pre EMI definition and meaning

To compare which is better, pre EMI vs full EMI, it is important to understand them both. Pre EMI is an option that borrowers can choose only if they are taking on a home loan for a property which is under construction. This is an option most borrowers choose because lenders disburse the loan amount partially and borrowers only have to pay the interest component of the loan and not the entire EMI (consisting of both principal and interest payment), until the entire loan amount is completely disbursed. You can start repaying the full EMI amount once the entire loan amount sanctioned is completely disbursed. Typically, you can pay pre-EMIs for a period lasting up to three years, under which construction should be completed.

Pre EMI simplified with an example

Let’s say Mr. Prem Kumar has applied for home loan from an HFC (housing finance company) and he is sanctioned an amount of Rs.5,000,000. The property Mr. Kumar intends to purchase is under construction. Now, if Mr. Kumar chooses the pre EMI option, the lender disburses the loan amount in different tranches, the first one being of Rs.500,000.

Since the loan amount disbursed is only a part of the actual loan amount sanctioned, Mr. Kumar only has to pay a monthly EMI of Rs.4,167 in pre EMI (calculated as Rs.500,000 x 10% / 12). Now, if Mr. Kumar takes the next disbursement of Rs.1,000,000 after a period of 6 months, he has to pay a pre-EMI amount of Rs.12,500 (calculated as Rs.1,000,000 x 10% / 12). Mr. Kumar’s actual EMI, i.e. principal + interest payment, begins only after the entire loan amount is sanctioned to him.

Full EMI – definition and meaning

Full EMI is a term used in reference to the EMI amount paid by borrowers immediately after the lender disburses the principal loan amount. Here, the principal amount may be disbursed partially or completely, but the borrower chooses to pay the entire monthly EMI regardless. If you opt for full EMI repayment, you have to pay the complete EMI and not as per the amounts disbursed.  Here’s an example to help you understand how full EMI works before we move on to the difference between pre EMI and full EMI.

Full EMI simplified with an example

Building on the above example, let’s say the home Mr. Kumar intends to purchase is under construction. Here, he has the choice of taking full disbursal of the loan amount. But Mr. Kumar opts for partial disbursal and takes a disbursement of only Rs.500,000 from his lender to pay the builder for the first tranche of construction. In this situation, even though the HFC has disbursed only Rs.500,000, Mr. Kumar chooses to pay the actual EMI payable on his entire loan amount of Rs.5,000,000.

If the HFC provides the home loan to Mr. Kumar at an interest rate of 10%, which is to be repaid in 20 years, his payable EMI would be Rs.48,251 per month on the loan amount of Rs.5,000,000. This EMI amount consists of both the principal amount and the interest component. Even though Mr. Kumar has opted to get the loan amount disbursed in instalments, he has to pay the entire EMI amount if he chooses the full EMI option.

Pre EMI and full EMI – the differences

The difference between Pre EMI and Full EMI can be understood with the help of the below mentioned points.

Difference in loan disbursal: If you opt for full EMI, you can seek disbursal of the entire loan amount, whereas if you choose pre EMI, the loan amount is disbursed partially.

Difference in loan repayment: The EMI amount you pay in the beginning is significantly lower in case of pre EMIs vs full EMI, where you have to pay the full EMI amount irrespective of the loan amount disbursed.

Difference in interest rate: Full EMI interest rates are calculated in accordance with the entire principal amount. Pre EMI interest rate is calculated in accordance with the disbursed loan amounts.

In conclusion, the EMI is the most significant aspect of home loans. So, you must understand concepts like pre and full EMI and the difference between pre EMI and full EMI. Doing this can help you make an informed decision in the loan application and repayment process.