EMI - Definition, Understanding & Why EMI is Important?
01 Nov 2019
A loan is always taken for a specific purpose, be it a housing loan, an automobile loan, an education loan or a personal loan. Whenever a loan is taken it has to be returned to the lender. These repayments are done in a specific format where the amount is deducted from the borrower’s account on a particular day of every month. The amount so deducted is also pre-decided and depends on various factors. This standardised deduction in financial terms is called as Equated Monthly Instalment or EMI.
The value of the EMI depends on four main factors. These are the amount borrowed, the rate of interest to be charged on the amount borrowed and tenure for which the loan is borrowed and the type of loan fixed or floating. If the loan is a floating one then there is one more component that affects the EMI which is called ‘Rest’.
All other parameters being equal higher the principal amount borrowed higher will be the EMI. Similarly, a higher interest rate would mean higher EMI, all other things being constant. If the amount borrowed and the interest rate is constant then a higher tenure would mean lower EMI and a lower tenure would mean higher EMI.
In the case of both the fixed and floating interest rate loan, in the first EMI outgo, the interest rate component is the highest and the principal is the smallest. By the time the borrower reaches the last EMI, the interest component is the smallest and the principal is the maximum.
In case of a fixed interest loan, the EMI remains the same throughout the period of the loan. While in the case of a floating interest rate loan, the borrower has the option of reducing the EMI amount periodically as per change in the interest rate or allowing the EMI to be constant and the period to reduce.
The borrower has the option of part prepaying his loan. Whenever this happens the option available to him is to either ask the lender to reduce his EMI amount from the date of repayment or to let the EMI amount remain the same but reduce the period of the loan.
In the case of a housing loan, the interest and principal that is being paid through EMI, is summed up at the end of the financial year to calculate its impact on tax benefits that the borrower can avail of.
In case a borrower defaults on any EMI the lender will impose a penalty on the non-payment or late payment that was missed/delayed..
In the case of regular - non-payment of EMIs, lenders will be taking more severe action to recover their money and the CIBIL score of the borrower is adversely effected, resulting in adverse effect on credibility of borrower for future loans.
The good part about EMI is that the borrower knows exactly the amount that will be going out from his bank account and on which date it will be deducted. The lender also benefits knowing the cash flow that will be coming into his account every month.
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What is a home loan Top-up-edited
It's a new year and a new normal in the lives of most people. Yet buying a home of one's own continues to be one of the biggest aspirations. However, with skyrocketing prices of real estate, property purchase remains out of the reach of many individuals. For this very reason, homebuyers are now increasingly opting for Home Loans to fund their dream house purchase. Banks and several lenders these days offer housing finance at competitive rates of interest, subject to several terms and conditions.
Add to that a top-up on your existing Home Loan product. Many banks, like Bank of Baroda, have Top-Up Loan in their range of loan products. As the name suggests, existing Home Loan customers who may need extra funds can opt for a top-up on their running Home Loans. Their eligibility for the same is ascertained by the lender based on your relation with the bank , their repayment history and credit score, among other things. The money from such a loan can be used for various purposes, be it for a wedding, fund your child's education, or renovate/repair your home.
At Bank of Baroda, if you switch your existing Home Loan from another bank via a balance transfer, you can get a Home Loan Top-Up. The minimum is Rs. 1 lakh and a maximum of Rs 2 crore. A processing charge of 0.25% of the loan amount is applicable on a Home Loan Top-Up from Bank of Baroda (minimum Rs 5,000 upfront and maximum Rs 12,500 plus GST).
Are you wondering why you should you take a top-up loan? We try answering that question here. Keep reading to find out more.
Eligibility Criteria for Home Loan Top Up
An existing Bank of Baroda Home Loan customer (including NRIs, PIOs, staff and ex-staff members), who may have availed of a Home Loan under public scheme or staff housing loans, is eligible for a Top-Up Loan on a Home Loan. The applicant must be at least 21 years of age (and a co-applicant should be at least 18 years old, wherever applicable). For a resident Indian applicant, the borrower's age plus the Top-Up Loan tenure should not exceed 70 years, as per laid down norms mentioned under the Bank of Baroda Home Loan Product (the same should not exceed 65 years for in case of NRIs, PIOs or OCIs).
New customers who opt for a Balance Transfer Loan (called a Home Loan Takeover scheme at Bank of Baroda) are also eligible for a Top-Up Home Loan.
Benefits of a Top-Up Home Loan
Minimal documentation, swifter loan approval and disbursal
If you're an existing Home Loan customer, getting a Top-Up on your Home Loan is easier. There is minimal documentation involves since the lender already has most of the required paperwork with you. Plus, knowing your repayment history and credit score patterns makes it more convenient for the banks to go through your Top-Up Home Loan application. This makes a speedy and hassle-free loan disbursal possible. Approach your branch for a quick top up loan.
Attractive interest rates
If you opt for a Top-Up Home Loan, you can get funds at fairly lower interest rates than those available in case of any other personal loan option.
Available for longer tenures
Depending on the period left in your existing Home Loan, you can opt for a Top-Up Loan for a relatively long tenure compared to other loan options.
Can put funds to use for a wide range of purposes
You can use the funds from a Top-Up Loan in any manner you deem fit. The money can be used to finance another home purchase, renovation and extension of an existing house, and even fund medical emergencies, a wedding, or your children's education. No restrictions are placed on how you wish to utilise this option unless you plan to use for speculation or illegal use.
Lower processing fee as compared to personal loans
The processing fee levied by banks in case of Top-Up Home Loans is generally lower than that applicable in case of personal loans.
While one can argue the pros and cons of a Top-Up Home Loan, it does serve as a good source of emergency funds. Moreover, the fact that you can avail of the option on your existing Home Loan makes the process less cumbersome. So if you're moving into that new house right away and need some more funds to settle into your place, this may be an option you'd want to take a look at.
Bank of Baroda customers who wish to apply for a Home Loan Top-Up can visit https//www.bankofbaroda.in/apply-for-baroda-top-up-loan-resident-nris-pios.htm?33 and fill out the form to begin the process.
What is the Best Age to go for a Home Loan?
Buying a home is a dream for every individual across the globe. The only problem is affordability. Buying a house needs to fit the budget. One’s dream need to be realistic in order to achieve it.
From a lender’s point of view a person becomes eligible for loan if he is earning a sufficient income from a legitimate source. He has to have a steady source of income and enough saving after taking care of the regular expenses and other loans as he has, to repay the equated monthly installments (EMI) of the home loan. These factors are known as creditworthiness of the borrower and credit behavior of a borrower is assessed in India by what is known as CIBIL score.
The CIBIL score takes into account the credit history of the person, whether he had defaulted on his loans earlier and similar other points.
Another point that comes up is age which decides the tenure of the loan that is relevant for purchasing a property.
Age in isolation is not a factor, what the lender would also like to look at is the earning and repayment capacity of the person, quality of the property he is planning to buy and the loan amount he is seeking.
Let’s take the case of a house property which is worth say Rs 75 lakh which includes all taxes and statutory charges. Assume that the lender is willing to fund 80 percent of the amount, which in our case is Rs 60 lakh.
Now, let’s consider three person aged 25, 35 and 45 who approach the lender for the loan on this property.
These days the younger generation gets a good starting salary especially if he has a good education or is a professional. In our case let’s consider an average individual.
Clearly, a 25 year old person can take the loan for the longest period possible, which in India can be around 30 years. The middle-aged person can be eligible for the loan for 20-25 years. The eldest individual will get a loan with a tenure of 10-15 years maximum. The lender would consider the useful working life of the borrower before fixing a tenure.
Lenders generally hesitate to lend a housing loan to an elder person. Part of the reason is the limited working life he has in front of him and secondly because his obligations increases with age. Children’s higher education needs to be funded, their marriage and medical cost associated with him and his spouse which can lead to cash flow mismatch going forward.
However, if the older person has a strong income stream and needs money for a shorter tenure, lenders would be interested in it. They may or may not ask for more collateral against the property since in a small tenure window price fluctuations can act as an added risk.
Or they may consider taking a higher down payment which would mean a lesser exposure and time risk for the lender.
Another way the older person can improve the chances of getting a loan is by applying for it with a co-borrower. This way the risk of the lender is reduced and there are more than one income stream to take care of the EMI payment.
There is no fixed and ideal age for taking a home loan. Finally what matters is the affordability. As a rule of thumb the EMI outgo should not exceed 30 percent of the income. Anything higher would put stress on the financials of the individual.
Financial markets in India have now matured offering an individual multiple avenues of raising money. Having said that, assets like a home is best bought as early as possible in one’s life since after this he can concentrate on wealth creation.
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