Pre EMI vs Full EMI – Know the Difference

When you avail of any type of loan, you must repay the amount in smaller installments known as equated monthly installment or EMI. The amount you repay as EMI is a combination of principal and interest components. And, depending on the type of loan you avail, the lender may not disburse the amount in full at once.In such cases, you may have to repay only the interest on the disbursed loan amount, which is known as pre-EMI. The best example where pre-EMI applies is a home loan for an under-construction property. The lenders disburse the sanctioned amount in installments at different stages of construction. Until the full amount is disbursed, you must pay only the pre-EMI.

As discussed above, pre-EMI is paying only the interest component of the loan. It is paid during the period when the home is under construction. Typically, the pre-EMI amount is lesser than the full EMI, and the amount you pay is not part of the loan term.Let us understand this with an example.Suppose Mr Rahul takes a home loan of Rs. 15 lakhs for 20 years. The construction of the house will take three years to complete. During this period, he pays a pre-EMI. After the construction is complete, the pre-EMI payment will end, and the actual loan term will begin, during which he must pay full EMI.

Full EMI repayment of a home loan includes both the principal and the interest amount. The repayment period begins after the construction of the home is complete. Some lenders may allow you to pay the full EMI while the construction is in process.Now that you know what pre-EMI and full EMI are, you may wonder which is better in the battle between pre-EMI vs full EMI ?You can choose pre-EMI under the following situations.

• If you want to save some money during the home construction period. You can use the funds for investment purposes and get valuable returns. For example, let us assume the full EMI is Rs. 25,000, out of which the interest component is Rs. 10,000. By choosing to pay only the pre-EMI, you can pay only Rs. 10,000 per month and invest the remaining amount, i.e., Rs. 15,000 and earn valuable returns. Thus, you can accrue money to pay the EMI at a later stage.
• Pre-EMI is an ideal option if you want to sell the property after the construction is complete.
• If your financial position is not sound and you cannot afford to pay the full EMI amount, you can opt for pre-EMI.

You can choose full EMI under the following situations.

• You can opt for full EMI payment if you want to pay the home loan during the home construction period and reduce the overall debt.
• If you think there is a possibility of a delay in the construction period, paying the full EMI would be ideal. If you choose pre-EMI in such a situation, the interest payment period would be more extended and increase the total loan cost.

• Calculating the interest rate The interest rate for pre-EMI is compounded based on the loan amount disbursed to the builder. In comparison, the interest rate for full EMI is calculated based on the sanctioned principal amount.
• Loan repayment term When you repay the full EMI, a larger part of the instalment goes towards repayment of the principal amount during the later stages of the loan period. This means, by choosing the full EMI option, you can repay the debt sooner than the pre-EMI option.
• Loan disbursal The financial organisations generally ask the home loan borrowers to pay the pre-EMI when they disburse the sanctioned amount in parts over a period. On the other hand, if you get the full disbursement at once in a lump sum, you must pay the full EMI.
• EMI payment start date If you choose the pre-EMI option, the monthly payment will begin as soon as the lender disburses the first installment during the construction period. In contrast, if you select the full EMI option, the repayment period starts only after the construction of the property is fully complete and you get possession.
• Impact on loan components When you choose the full EMI option, after each instalment you repay, the principal amount and the tenure reduces. However, when you repay the pre-EMIs, the installments do not impact the principal amount, term, or interest rate of the loan.
• Impact on your personal finances Paying the EMIs through the pre-EMI option can be affordable as you repay only the interest amount during the construction period. This may not be possible if you choose the full EMI option.
• Reselling the property If you opt for a pre-EMI, you can resell the property within a few years after the construction is complete. However, if you opt for the full EMI option, you may not sell the concerned property for a specific period.

There is no difference in the tax benefits for pre-EMI and full EMI repayment methods; you enjoy the same tax benefits. The interest amount you repay through pre-EMI during the under-construction period, you cannot claim tax benefit on the same.However, once you get the possession certificate, the interest you repay in pre-EMI will be aggregated and considered for a tax deduction in five equal installments. The tax deductions on home loan interest repayment are covered under Section 24 of the Indian Income Tax Act. You can get a deduction of up to Rs. 2 lakhs in a financial year.

The equated monthly installments are the most critical aspect of home loans . So, make sure that you know the difference between pre-EMI and full EMI repayment options. This will help you make an informed choice and repay the loan without hassles.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.