What is an EMI?

01 Nov 2019

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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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Different Types of Loans for Your Home

Different Types of Loans for Your Home
With property rates rising with each passing year, it is almost impossible to buy one from your savings. Thankfully, you do not need to worry about exhausting all your savings to become a property owner. You can get the necessary funds with the help of a Home Loan. You can also get a loan for construction or land purchase. Each type of loan is designed to help fulfil a specific objective. You can choose the type of Home Loan that best serves your needs. Let us take a look at the different kinds of Home Loans provided by banks in India.
A Standard Home Loan
The Standard or Basic Home Loan is the most common type of House Loan. You can take this type of loan to purchase residential property, which could be brand new, under-construction, or even a pre-owned.
A Home Construction Loan
If you do not want to buy an existing property but instead build a house on a piece of land you own, you can also opt for a Home Construction Loan. In this type of loan, the bank disburses the loan amount in instalments based on how the construction progresses. You have to provide an estimate of the amount of money you need at every stage of construction.
Land or Plot Loan
Just as you can buy an already existing property with a Standard Home Loan, so can you buy a piece of land. This type of Home Loan is known as the Land or Plot Loan. To be eligible for this loan, you must ensure that the property documents like ownership, a title deed, etc., are clear as the bank is not responsible for checking the same. Further you are also required to construct residential house within 3 years. More on that below!
Home Improvement and Extension Loan
If you want to remodel your existing property, you need to apply for a Home Improvement Loan. You can apply for this loan if you wish to paint your home, fix a leaky ceiling and hanging wires, or give your property a face-lift. A Home Extension Loan enables you to enlarge your home's size by adding rooms, extending floors, etc.
Top-Up Home Loan
The Top-Up Home Loan is one where you can get more finance on your existing Home Loan for any purpose. For instance, you may want to construct a property while still repaying your Home Loan or remodel your house while still repaying your Standard Home Loan or you need fund for marriage of your daugher. To be eligible for a Top-Up Home loan, you should ensure that you've repaid all your EMIs on time.
Pre-Approved Home Loan
Bank of Baroda offers a special type of Home Loan known as the pre-approved Home Loan, wherein you can apply for the loan first and then start looking for a property based on the loan amount you are eligible for. The bank determines your eligibility based on your income and repayment capacity. This type of loan allows you to choose a property that suits your eligibility.
PMAY Loan
Banks in India (in partnership with the government) offer home loans at subsidised interest rates. Members of economically weaker sections, light, and medium-income groups are eligible for such a loan. This loan is known as the Pradhan Mantri Awas Yojana or PMAY loan, wherein qualified applicants can become owners of 'pucca' houses in urban and rural India. Family should not have any other residential house other than proposed to be purchased/constructed.
Balance Transfer Home Loan
Do you have an existing Home Loan with a bank or NBFC? Are you paying a high-interest rate on that loan? Now you can transfer your Home Loan to Bank of Baroda under a special type of House Loan – The Balance Transfer Home Loan. Transferring the loan to a bank offering a lower interest rate can reduce your Home Loan's actual cost.
How to Apply For Home Loan Online?
You can apply for different types of home loans online. Bank of Baroda offers standard home loans, top-up, balance transfers, pre-approved or PMAY loans. You need to visit the website to begin the online application process. Fill an online form and provide your personal and income details and the loan amount you need. The bank assesses your eligibility and informs you of the maximum loan amount you can get, as well as the interest rate you will be charged. The online process reduces the need to visit the bank frequently, with documents in tow - ????.
So what are you waiting for? Visit Bank of Baroda to choose the type of Home Loan that suits your needs. Begin the process of becoming a homeowner today!

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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