When you take a loan for purchasing a home or a vehicle, paying it back in instalments becomes a crucial aspect of your financial planning. Equated Monthly Instalments (EMI) are a fixed amount of money that you pay to the lender each month to repay the loan amount, along with interest charged. There are two types of EMI payments – EMI in arrears and EMI in advance.This blog will discuss the understanding of EMI in Arrears vs EMI in Advance.
EMI in Arrears
EMI in arrears is a type of loan repayment where you pay the EMI after the end of each month. In other words, you pay for the previous month’s loan in the current month. For instance, if you take a loan in January, your first EMI will be due in February. This type of EMI calculation is generally used in home loans and personal loans.
EMI in Advance
EMI in advance, on the other hand, is a type of loan repayment where you pay the EMI before the start of each month. For instance, if you take a loan in January, your first EMI will be due in the same month. This type of EMI calculation is generally used in car loans and other short-term loans.
Impact on Loan Repayment Burden
The type of EMI calculation you opt for can have a significant impact on your loan repayment burden. EMI in arrears puts you under the burden of paying two EMIs in the same month. This is because, in the first month, you have to pay both the current month’s and the previous month’s EMI. On the other hand, EMI in advance puts you under the burden of paying the EMI before the start of each month, which may impact your cash flow.
Interest and Principal Component
EMI consists of two components – interest and principal. The interest component is the cost of borrowing the loan amount and is a crucial aspect of loan repayment. The principal component is the repayment of the loan amount that you borrowed. The interest component is higher in the initial stages of loan repayment and reduces over time. On the other hand, the principal component increases as you move towards the end of the loan tenure.
When it comes to financial planning, the type of EMI calculation that you opt for can impact your loan repayment burden and cash flow. Hence, it’s crucial to consider your financial situation and choose the type of EMI calculation that works best for you. If you have a stable source of income and a good cash flow, EMI in advance may be a better option. On the other hand, if you have a fluctuating source of income, EMI in arrears may be a more suitable option.
In conclusion, understanding the difference between EMI in arrears and EMI in advance is crucial for effective loan repayment and financial planning. It helps you choose the type of EMI calculation that works best for you and reduces the burden of loan repayment.