EMI (Equated Monthly Instalment) is a common mode of repayment for loans, including home loans, personal loans, and car loans. EMI is an amount that the borrower needs to pay to the lender every month until the loan is fully paid off.
Two types of EMI payment systems exist: EMI in arrears and EMI in advance. In this blog, we will take a deep dive into both systems and understand the difference between them.
EMI in Arrears
EMI in arrears refers to a system where the borrower pays the EMI after the end of each month. For example, if you have taken a loan in January and your EMI is due in February, you will make the payment for January in February. In this system, the interest is calculated on the outstanding loan amount for the previous month.
The advantage of EMI in arrears is that it is easier for the borrower to manage their finances as they know exactly how much they need to pay each month. Moreover, they can make use of their salary to pay other bills and expenses before paying the EMI.
EMI in Advance
EMI in advance, on the other hand, refers to a system where the borrower pays the EMI before the start of each month. For example, if you have taken a loan in January and your EMI is due in February, you will make the payment for February in January. In this system, the interest is calculated on the outstanding loan amount for the current month.
The advantage of EMI in advance is that it reduces the interest cost for the borrower as the interest is calculated on a lower outstanding loan amount. Moreover, it helps in building a good credit history as the borrower is making the EMI payments on time.
Which one is Better - EMI in Arrears or EMI in Advance?
The choice between EMI in arrears and EMI in advance depends on the borrower’s financial situation and preference. If the borrower has a stable income and is confident about their ability to make the EMI payments on time, then EMI in advance might be a good option as it reduces the overall interest cost.
On the other hand, if the borrower has a variable income and is not confident about their ability to make the EMI payments on time, then EMI in arrears might be a better option as it provides more time for the borrower to manage their finances and make the payment.
In conclusion, both EMI in arrears and EMI in advance have their own advantages and disadvantages. The best option depends on the borrower’s financial situation and preference. It is advisable to consult with a financial advisor before making a decision.
