Pre-EMI vs. Full EMI: Understanding the Key Differences
Are you planning to buy property soon? If so, you’ve probably come across terms like Pre-EMI and Full EMI. Understanding these payment options is crucial for making an informed decision. Want to know more about what they mean, their benefits, key differences, and the tax implications? Let’s understand it step by step!
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ToggleWhat is Pre-EMI?
Pre-EMI stands for Pre-Equated Monthly Instalment and is primarily associated with loans for under-construction properties. When you take a personal loan for such a property, the entire loan amount is not disbursed immediately. Instead, it is released in stages based on the progress of the property’s construction. The borrower is required to only pay the interest on the amount disbursed, instead of the principal amount. The interest paid on this disbursed amount is pre EMI.
What is Full EMI?
Full EMI stands for Equated Monthly Instalments. It is the fixed monthly payment that the borrower is required to make after the personal loan is fully disbursed. The EMI comprises both the principal and interest components of the loan. Typically, full EMI payments begin once the property’s construction is completed, and the borrower takes possession.
Pre EMI vs Full EMI: Key Differences
When taking a loan, especially a home loan or construction-linked loan, borrowers often encounter two repayment options: Pre-EMI and Full EMI. Both these options impact your financial planning and repayment strategy differently.
The key differences in Pre EMI vs Full EMI to help you make an informed decision based on your cash flow, loan tenure, and financial goals.
Factor | Pre EMI | Full EMI |
Meaning | Pre-EMI is the interest paid on the loan amount. | Full EMI refers to the full amount paid, comprising of the interest and the principal amount. |
Loan Disbursement | The loan is disbursed as per the construction phases. One only needs to pay the interest on it. | The entire loan amount is disbursed instantly. |
Total Interest Paid | Interest paid is slightly higher, since the principal amount is not being paid initially. | The principal and interest amount are paid from the start; thus, the interest is lower. |
Tax Benefit | Limited tax benefit, since only the interest amount is paid initially. | Tax can be claimed since it includes the principal and interest. |
Application | Pre-EMI is commonly taken for under-construction properties. | Full EMI applies to ready-to-move-in properties or properties where possession has already been given. |
Also Read: Part Payment Vs Prepayment Vs Pre-Closure: When Is It A Good Option?
Advantages and Disadvantages of Pre-EMI
Advantages of Pre-EMI
Low Burden Initially: Pre-EMI implies paying on the interest on the disbursed loan amount. Thus, the financial impact is lower on the borrower during the initial phase of the payments.
Payment Flexibility: Pre-EMI offers flexibility to those borrowers who do not wish to pay the full EMI amount until the property is in possession.
Tax Deduction: The borrower can avail tax benefits under Section 24(b) of the Income Tax Act, 1961.
Disadvantages of Pre-EMI
Longer Burden: The Pre-EMI amount is not deducted from the principal amount. Once the construction of the property is completed, you will need to pay the EMI in full, leading to a longer payment period.
Advantages and Disadvantages of Full EMI
Advantages of Full EMI
Fast Loan Repayment: The loan is repaid faster as compared to pre-EMI with loan amount reducing with each payment.
Easy to Manage Finances: Since the amount is fixed monthly, it is easier to budget and plan to manage it along with your other expenses.
Disadvantages of Full EMI
High Outflow: As the borrower pays installments in full each month, this can put a significant financial burden.
How to Choose Between Pre-EMI and Full EMI
Choosing the right option will depend on your financial situation and goals. Some key factor to consider include:
Current Financial Situation: As a borrower, you need to assess if you can easily make a full EMI payment or require the EMI amount to be low to manage your existing expenses.
Property Status: If your property is under construction and you are tight on budget, it may be a good option to opt for the Pre-EMI option.
Investment Strategy: If you plan to sell or rent the property after possession, it may be a good option to opt for the full-EMI option.
Factor in Interest Rate: Consider the fluctuating interest rates. If you know that the interest rate may increase, it would be a good option to opt for a Full EMI to get a fixed interest rate.
Also Read: Flat Interest Rate Vs Reducing Rate: Know the Difference
Tax Implications of Pre EMI Vs Full EMI
For Pre-EMI, you cannot claim a tax deduction until the construction period of the property is over. Once you get possession of the property, interest payments will be totaled and be applicable for a tax deduction in 5 uniform installments. You can claim this deduction under Section 24.
For full EMI, under section 80(c) of the Income Tax Act, tax deduction is applicable for a maximum amount of up to Rs 1.5 lakh that can be availed per financial year on the principal repayment portion of the EMI.
Conclusion
Pre-EMI and Full EMI each offer advantages and their related limitations. As a borrower, you need to assess your current financial standing, financial goals and payment preferences, to make the choice that best suits you. If you still have doubts, it is advisable to seek a professional financial advisor to clear up your queries and give you a better idea for EMI payments.
Frequently Asked Questions
What Is The Main Difference Between Pre-EMI and Full EMI?
The main difference between pre-EMI and full EMI lies in the timing and components of the payments.
Can I switch From Pre-EMI to Full EMI During The Loan Tenure?
Yes, it is possible to switch from pre-EMI to full EMI during the loan tenure. However, it is important to check lender terms and charges for making the switch.
Are There Tax Benefits Associated with Pre-EMI Payments?
Yes, tax benefits on pre-EMI payments are available under Section 24(b) for home loans for the interest paid during the construction period, but the deduction can be claimed in five equal installments after the property is completed. No benefits are available under Section 80C for Pre-EMI as it doesn’t include principal repayment.
How Does Pre-EMI Affect My Loan Tenure?
Pre-EMI payments only cover the interest portion of your loan, pre emi meaning they do not reduce the principal amount. As a result, your loan tenure remains unchanged during the Pre-EMI period.
Does Choosing Pre-EMI Increase The Total Interest Paid?
Yes, choosing Pre-EMI can increase the total interest paid over the loan tenure because it primarily covers interest without reducing the principal amount.
Can I Prepay My Loan During The Pre-EMI Period?
Yes, you can prepay your loan during the pre-EMI period, but it may not directly reduce your loan tenure since pre-EMIs primarily cover interest, not the principal.
How Do Lenders Calculate Pre-EMI Amounts?
Lenders calculate Pre-EMI amounts based on the loan amount, interest rate, and the period before full EMI payments begin.
Is Pre-EMI Available For All Types Of Loans?
Pre-EMI is typically available for loans such as home loans, personal loans, and car loans, but its availability depends on the lender and the specific loan terms.
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