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Read on to learn how you can figure out the functionality of the different loan parameters and what role they specifically play in your loan repayment pattern. BankBazaar.com’s EMI calculator is a fantastic tool that can help you manage the various loan parameters to become debt free in the most efficient manner possible.
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While it is not very difficult now to take a personal loan, it is not so simple to pay back the loan. This is because personal loans...
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Neeraj, a middle class sales and marketing professional based in Pune, purchased a decent abode in a metropolitan...
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While it is not very difficult now to take a personal loan , it is not so simple to pay back the loan. This is because personal loans are unsecured loans , and come with high interest rates. As a result, the Equated Monthly Instalment factor (or the EMI) can be a drain on your salary, depending on the amount and tenure for which you borrow.
Before we get into how the EMI is calculated and what it is comprised of, let’s briefly understand what an EMI is. An EMI is the monthly amount you pay to your bank towards repayment of the loan you borrowed. All loans come with the concept of EMI and even credit card dues can be repaid in the form of an EMI. EMIs can be effected by various ways, depending on the bank you deal with. It can be in the form of a standing instruction, by giving post dated cheques or by having an electronic clearing service from your account in another bank. Whatever be the mode of EMIs, the concept of calculating EMI is the same.
The EMI Break up
An EMI, as you know, comprises of principal component and an interest component. If you have taken a personal loan of Rs. 5 lakhs for 1 year, then this amount is divided into small parts across the 5 year. If the interest rate is 15% per annum, then this interest on the loan is also apportioned across the tenure and forms a part of the EMI. In the initial years of any loan , the interest forms a larger portion of the EMI . Then, as the years go by and the loan nears completion of tenure, the principal component increases.
Let’s understand better with an example. Taking the same case as above, the EMI for a Rs. 5 lakhs personal loan for 1 year at 15% pa rate of interest is Rs. 45,129. So you will have to pay Rs. 45,129 every month for 1 year as repayment. This amount is split into principal repayment and interest repayment, with interest component being higher initially, as below:
|Month||Principal||Interest||Total EMI||Principal Component||Interest Component|
|1||Rs. 38,879||Rs. 6,250||Rs. 45,129||86%||14%|
|2||Rs. 39,365||Rs. 5,764||Rs. 45,129||87%||13%|
|3||Rs. 39,857||Rs. 5,272||Rs. 45,129||88%||12%|
|4||Rs. 40,355||Rs. 4,774||Rs. 45,129||89%||11%|
|5||Rs. 40,860||Rs. 4,269||Rs. 45,129||91%||9%|
|6||Rs. 41,371||Rs. 3,759||Rs. 45,129||92%||8%|
|7||Rs. 41,888||Rs. 3,241||Rs. 45,129||93%||7%|
|8||Rs. 42,411||Rs. 2,718||Rs. 45,129||94%||6%|
|9||Rs. 42,941||Rs. 2,188||Rs. 45,129||95%||5%|
|10||Rs. 43,478||Rs. 1,651||Rs. 45,129||96%||4%|
|11||Rs. 44,022||Rs. 1,107||Rs. 45,129||98%||2%|
|12||Rs. 44,572||Rs. 557||Rs. 45,129||99%||1%|
|Total||Rs. 5,00,000||Rs. 41,550||Rs. 5,41,550||100%||100%|
As you can see from the above table, the interest component of the EMI is very high in the initial months and gradually tapers off. The effect of a high interest component can be better understood when the tenure is longer. If we extrapolate the above for a 5 year loan, the repayment pattern for the initial few months will be as follows:
|Month||Principal||Interest||Total EMI||Principal Component||Interest Component|
|1||Rs. 5,645||Rs. 6,250||Rs. 11,895||47%||53%|
|2||Rs. 5,716||Rs. 6,179||Rs. 11,895||48%||52%|
|3||Rs. 5,787||Rs. 6,108||Rs. 11,895||49%||51%|
|4||Rs. 5,859||Rs. 6,036||Rs. 11,895||49%||51%|
|5||Rs. 5,933||Rs. 5,962||Rs. 11,895||50%||50%|
|6||Rs. 6,007||Rs. 5,888||Rs. 11,895||50%||50%|
|7||Rs. 6,082||Rs. 5,813||Rs. 11,895||51%||49%|
|8||Rs. 6,158||Rs. 5,737||Rs. 11,895||52%||48%|
|9||Rs. 6,235||Rs. 5,660||Rs. 11,895||52%||48%|
|10||Rs. 6,313||Rs. 5,582||Rs. 11,895||53%||47%|
The above will continue for 60 months (total tenure) and in the 60 th month, the principal component will be 99% and interest will be 1% of the EMI. Total interest paid on the above loan will be Rs.2,13,698, which is almost 43% of the principal.
So it is clear that you will be paying exorbitant amount as interest over the tenure of the loan. For larger loans with longer tenures, the interest burden is higher.
How can you as a borrower calculate EMIs?
These days, it is very simple to check if the EMI charged by your bank is correct or not.
If accessing online calculators or using Excel is difficult, then you can use the conventional mathematical formula: EMI = (Principal x interest rate)*(1+interest rate) n / ((1+interest rate) n - 1). Interest rate is again the monthly interest rate and n is the tenure in months.
Understanding the EMI Calculations
EMI is a Equated Monthly Installment that has to be repaid to lending institution within specified number of months based on the rate of interest, total loan amount and the tenure of repayment that is agreed upon by both the parties. The EMI comprises of two basic elements – The Principal and the Interest. The basic calculation is done by finding the total loan amount plus the interest accrued on it and dividing the same by the repayment period.
Types of EMIs
There are 3 basic types of EMIs that are prevalent for home loans in India.
The Pre EMI: This applicable in cases where the entire loan amount is not disbursed at a time and rather given to the borrower in installments depending on the stage of construction of the house. This type of EMI comes into play when one buys a house in an underdevelopment project or constructs own house on a piece of land. Here the time gap between the first installment and the complete disbursal of the loan may be up to a couple of years, thus the Pre EMIs are designed to fill in that gap.
The Tranche based EMI: This is a special variant of the EMI where the borrower starts paying the full EMI even the project is under construction and the entire amount of the loan ahs not been disbursed. For the tranche based EMIs the borrower has to pay an EMI which covers the minimum amount of interest that is applicable for this period. However it is a smart idea to start repaying the entire EMI from the beginning because the amount that is over and above the interest element will immediately be counted towards the principal thereby reducing a significant portion of the outstanding principal and ultimately reducing the loan tenure.
The Accelerated EMI Repayment: This is a provision available with a few financial institutions wherein the borrower starts accelerating the repayment based on his calculations of higher income in the future during the period of repayment. This is a good tool to repay the loan earlier thereby saving on the total interest paid towards the loan. At times when there is any amount of surplus cash or one receives a bonus this provision can be employed for reducing the burden of the loan.
Neeraj, a middle class sales and marketing professional based in Pune, purchased a decent abode in a metropolitan by securing a home loan worth Rs. 24 Lakhs from a leading financier. Divided into easy monthly installments, Neeraj was reducing his liability quite comfortably. Being able to increase his bank balance to Rs.8 Lakh, Neeraj found himself in a dilemma of whether to invest his hard-earned money for the future or prepay a major chunk of his home loan. Living under the notion of heavy prepayment penalties, Neeraj let his instincts prevail and opted to channelize his surplus funds towards an unhealthy investment and ended up on the losing side. Had he been aware of the changed prepayment rules and acted smartly, he would have successfully used his surplus funds to reduce his burden.
There is an interesting irony when it comes to home loans . Till the time people don’t have such a liability, they yearn to get one at the earliest possible and fulfill their dream. However, once they apply for home loan and secure the required funds, repaying it in a timely manner becomes the top listed priority in life, even if that means compromising with their standard of living. With the prepayment option now in the picture, the repayment process seems even more challenging than before. Prepaying a part of the home loan is certainly a prudent decision. The final decision will definitely rest with the borrower, who must take into account the associated benefits and the hidden costs, before jumping the prepayment bandwagon. Do remember prepayment charges according to the RBI mandate are applicable only on fixed rate home loans in most banks.
Why is Prepayment a Good Option?
One of the primary benefits associated with loan prepayment is the significant reduction in the interest outgo. When one prepays a certain portion of the mortgage loan, the outstanding balance from the principal amount is reduced, which consequently helps in cutting down the interest payout. Indirectly, this helps in bringing down the original value of the home by a substantial amount. If selling the property is on the cards in the future, one can easily and quickly recover the original cost and make profits from a bigger property purchase.
What are the available options?
When people consider the option of prepaying a debt, they have two options at their disposal. The bank allows them to either reduce the amount of their monthly EMI and maintain the tenure, or have the tenure reduced by lowering the number of monthly installments. Retaining the tenure and reducing the amount of monthly EMI certainly help in improving the cash flow. While, on the other hand, reducing the loan period and maintaining the same EMI would equip them with the power to enjoy interest savings over a period of time. One just needs to assess the options according to personal convenience and make an informed decision.
How much will it cost you?
The financiers make their money in the form of interest, service charges and other kinds of fees charged on loans and advances given to the customers. It goes without saying that banks will make profit only if the loan accounts remain open for a great deal of time. The banks can’t sojourn the right of the borrowers to prepay their loans. However, at the same time, it would certainly mean upsetting the overall profits of the bank. This is the reason why banks levy penalties on the borrowers for compensating their lost profits. The penalty fee charged on prepayment varies from one bank to the other.
Here is a tally of prepayment penalties charged by some of the top home loan providers in the market.
|ICICI Bank(Zero charges on floating rate loans)||
|State Bank of India||0% prepayment penalty irrespective of the period of account or source of funds.|
|Punjab National Bank||2%, only in case the account is taken over by other bank or financial institution.|
As on April 6, 2014
The Final Call
Though the home loans come with long repayment periods, it doesn’t mean that they have to be dragged for decades. If one is sitting on a strong pile of money, channeling it towards well-calculated prepayments would be a wise move. At the end of the day, it is the dismissal of unnecessary EMI burden that helps in maintaining a healthy cash flow over the period of time.
Buying a home is a very significant investment for most of us. You would not like to take a risk with any inappropriate investment. During this project of buying a house, the procurement of home loan is equally important, as selecting a property is. In fact, for most of us, the decision of purchasing a property is based on the amount of home loan that we can avail. Getting a Home Loan might appear as an extensive project. But if you follow a few tips discussed in this articles, then you can smoothly run through the complete process without any hassles. This article shall help the investors especially the first time home buyers to know what exactly they need to do to become home loan ready.
The process of becoming Home Loan ready starts 6 months prior for those who never bothered to be financially disciplined. Follow these simple steps as soon as possible to inculcate financial disciple in your life.
1. Clean up your Credit Report
The first and the foremost point that all loan providers, refer to before lending, is your Credit Report. All the lenders expect you to have a clean credit history with a good credit score of 650+. Make sure to check your CIR (Credit Information Report) as well as your Credit Score online ATLEAST 6 months prior to applying for loan. This will provide you sufficient time to set your score right if there is a problem. And give you confidence if you have a good Credit Score. You can buy your CIBIL TransUnion credit report (including credit score) online for Rs.470 only.
Tip: Pay off all your delinquent accounts, late payments etc. and start making regular payments for your Credit Cards and loan EMIs at least 6 months before availing home loan.
2. Pay off existing debt:
If you are have availed multiple loans, then try to pay off these loans before you apply for home loan. As having several loans might affect your loan eligibility, few Banks however, along with your home loan, provide a scheme of debt consolidation also. But this is subject to your monthly income. As any other EMIs that you are paying right now, gets factored while calculating your loan eligibility. The lesser EMIs you pay each month, more is your loan eligibility based on your income.
3. Improve your Banking Habits:
Whenever you apply for any loan, the bank account statement is one of the most important documents that lender asks. Through your Bank Statement, the lenders verify the banking habits, lifestyle (easily noticeable if you use your debit card frequently) and your repayment behaviour. The lender expects you to have a good credit balance every month (at least equivalent to the EMI that you will repay for your Home Loan). Please ensure that there is no cheque bouncing especially due to “Insufficient Funds”. However, other cheque rejection reasons like “Signature Mismatch” are still acceptable as an exception. But such instances should not exceed twice in last 6 months to 1 year. The lenders generally ask for last 6 months Bank Statement, if you are salaried, and last 1 year statement, if you are self-employed.
4. Keep your documents in place:
When you apply for Home Loan, following documents need to be submitted to the lender:
|Self Employed Professionals||Self Employed Businessman|
|Application form with photograph||Application form with photograph||Application form with photograph|
|Identity and Residence Proof||Identity and Residence Proof||Identity and Residence Proof|
|Latest Salary-slip||Education Qualifications Certificate and Proof of business existence||Education Qualifications Certificate and Proof of business existence|
|Form 16||Last 3 years Income Tax returns (self and business)||Last 3 years Income Tax returns (self and business)|
|Last 6 months bank statements||Last 3 years Profit /Loss and Balance Sheet||Last 3 years Profit /Loss and Balance Sheet|
|-||Last 6 months to 1 year bank statements||Last 6 months to 1 year bank statements|
On the basis of above documents, the lender can offer in-principal approval for your loan application. That is, the loan is sanctioned subject to positive property verification.
In addition to the above documents, you need to submit the copy of all property papers that you desire to purchase. It is always recommended to verify the complete chain of property documents available with the seller for at least last 13 years, before entering into “Agreement to Buy”. The Banks, generally, do not process the loan application without the “Agreement to Buy/ Sell”. If you are not confident on the property chain, it is always advisable to consult a property lawyer well in advance. The lawyers, analyse the chain of the property and help you in making the decision to buy or reject the property. They also help in execution of the sales/ purchase transaction.
5. Office and Residential Stability:
The lenders, along with verifying your income, banking and property papers, they also verify your job and residential stability at current address. This is done to avoid the risk of a fraud or any desertions later during repayment of loan. Hopping the job frequently might get you into trouble while you apply for loan. Generally, a stability of at least 6 months is desired both at residence as well as work place.
6. Apply for Pre-Approved Loan:
If you intend to buy a property within a couple of months, then you can apply for pre-approved home loan with the Bank. As mentioned above, most of the Banks, these days, sanction a loan amount that can be extended to you, even before you have zeroed in the right property for you. As an extension to this service, many lenders like ICICI Bank and HDFC Ltd. help their customers to find their dream home. For instance, HDFC has started an online portal www.hdfcred.com wherein all the projects approved by HDFC have been listed. The borrowers can get their loan pre-approved and can then start looking for a home. This also enables you to be more precise with your budget for buying the property.
7. Understand the Loan Process of lenders:
Whenever you apply for a loan, be prepared for lot of queries, phone calls and different visitors walking in on behalf of the Bank/ lender. The loan providers follow a process wherein they outsource most of the verification process to third party vendors. After verifying their identity cards, you can address to their queries. Your loan application is processed and approved/ declined by the Credit department of your lender that generally takes 4 to 8 working days to make a decision on your loan application. Once the loan is approved, then your sales officer guides you on further process of completing rest of the formalities.
8. Do an online research:
As you get prepared for availing a Home Loan, do not forget to do an online research on the best rates and schemes offered by different lenders. There are different Home Loan products available in the market as per your requirements. For example: some lenders offer a product “Home Loan OverDraft” that is best for those who wish to make pre-payment of their loan. Although, RBI has mandated all the lenders to waive off the pre-payment penalty charges. But still, having a Home Loan OD (OverDraft) saves you from the hassles of approaching the lender for pre-payment, standing in a queue, filling up form and rest of the formalities. It is a unique product that gives you freedom to transfer surplus funds to your HL (Home Loan) account online to save on the interest repayment. At the same time, it also allows you to withdraw some funds from your HL OD account.
When used prudently, your 86×54 mm magic box (credit card) can do wonders for you. Fully loaded with rewards, credit card as a financial product, has turned out as personal favorite for many. You can draw maximum benefit from rewards program, if you use your credit card the right way. With the rising competition in credit card industry, the card issuers are providing numerous offers to their customers to grab bigger share of the pie. The Credit card reward program offers cash back, travel offers, reward points, credit card deals and many more. All these offers are worth it when you are well-versed with do’s and don’ts for your credit cards. Following are some of the ways that assist you to get maximum out of your credit card:
Following things you should do:
Keep track of your transactions: You should always monitor your transactions through mobile/ e-mail alerts. Whenever you get a mobile alert, make sure you read the complete message from credit card provider. Along with this, make it a practice to read and verify your monthly credit card statement. If you find difficult to remember all your purchases, then it is better to save all the receipts and compare it with your credit card statement each month. Whenever you notice any unauthorized transaction, make sure you call up customer care and inform them about the transaction immediately.
Check your credit profile once in a year: Your credit card providers always share details of your repayment with several credit agencies like CIBIL TransUnion, Equifax etc. who in turn rate you on a credit score ranging from 300-900. It is a good practice to buy your credit score and complete report, at least once in a year to keep track of your credit history. Your credit score tells the lender how likely you are to pay back loan or credit card dues based on your past repayment behaviour. The higher your score, the more the chance of your loan application getting approved! If you know your credit score, you can always work towards improving it over a period of time. And if you find any error in your report, you can always dispute it with the agency and take it up with concerned lender to rectify it.
Remember your credit card number: Using only one credit card provides maximum benefit in terms of reward points and ease in handling. It is always advisable to remember your credit card number so that even if you miss your credit card somewhere, you can immediately report it to the customer care. Remembering your credit card number also simplifies the process during online shopping as you need not always take out your card and copy its number each time you shop.
Understand your credit card charges: Before you sign up for a credit card, it is very important to know all the charges that are associated with that card. Usually, the credit card companies charge for: Joining & Annual Fees, Late payment (late fee and interest), Cash Advance fee, Over Credit Limit charge, Cheque/ECS Bounce Charge, Petrol Transaction Charge, Statement Request (beyond 3 months), Foreign Currency Transaction etc. It is advisable to read and understand the schedule of charges along with the “Terms and Conditions” of the credit card beforehand to avoid any disconnect later.
Keep yourself updated on misuse of credit card: While using a credit card, you should always be informed on the risks and frauds that can happen and the ways to prevent them. The best way is to read all the e-mailers/ letters sent by your credit card providers as they always keep their customers informed on any new precautionary measures and ways to protect your credit card. Also, read more on my article “10 smart ways to avoid credit card frauds” to keep yourself informed about various credit card frauds and ways to can avoid it.
Following things you should not do:
Don’t miss your credit card payment: There is always a cost associated with the benefits that you enjoy. The credit card companies, who lend you money for an interest free period of around 45 days and also provide you rewards for your purchases, ought to charge a fee ranging from 22-45% p.a if you fail to make the timely payment. If you want to enjoy these free benefits, then you should promptly repay your credit card dues each month i.e. by inculcating self-discipline, you can avoid these charges on your card.
Never pay only minimum: Paying only the minimum due amount might not classify you as a defaulter but may cost you an interest on the funds borrowed by you. You should always try to repay your complete credit card bill each month to avoid high charges. However, there may be months when due to some unexpected expenses, you might not be able to repay the credit card balance in full. Then only during those months, you should make at least the minimum payment and don’t increase your credit card balance by more purchases. If you know you don’t have the money to pay your credit card balance, then avoid using it until you can afford to pay new charges again.
Do not fully utilize your credit limit: Your credit score might get affected if you fully exhaust your credit limit and if you exceed your sanctioned credit card limit, then you may have to pay charges to your credit card provider. It is always advisable to use up to 50% of the credit limit sanctioned to avoid any negative impact on your credit limit.
Never share your credit card information: You should never share your credit card details, especially the password and PIN, with anyone (not even the customer care executive). Always ensure to enter or key-in your IPIN over the conversation with customer care and do not spell it out as this can lead to sharing of sensitive information over the phone with a third party.
Never trust all websites: While you use your credit card online , always ensure to check the valid source and authenticate the genuinely of the website where you use your credit card. Always shop from the reputed websites and never trust the public computer or Wi-Fi as this might hack your credit card details.
By taking some precautionary measures, you can safely use and enjoy the benefits of a credit card. You just need to be a little careful while you use a credit card and by doing this, you can become one of the delighted credit card customers.