Advance EMI vs Arrears EMI: Understanding the differences

An Equated Monthly instalment or EMI is a fixed monthly payment made by a borrower to a lender to repay a loan over a stipulated period.

It consists of both principal and interest components. The original sum borrowed from the lender is called the principal amount. The cost of borrowing the principal amount when expressed as an annual percentage rate is known as the interest.

EMI is crucial for loan repayment. It offers structured and predictable payments to help borrowers manage their finances effectively.

This article explores the key differences between advanced EMI and arrears EMI. The main difference lies in the timing of the first EMI payment and its effect on the loan amount and interest.

The timing of EMI payments can be categorized into two types: advance EMI and arrears EMI.

Advance EMI: The borrower pays the EMI at the beginning of the month. This reduces the outstanding loan amount and the interest accrued for the subsequent month.

Arrears EMI: The borrower pays the EMI at the end of the month, which is the more common option.

Advance EMI

In this option, the first EMI is paid upfront at the time of loan disbursal. That means, the initial payment typically consists only of the principal amount. The main benefit includes the reduction in the total loan amount, resulting in lower overall interest paid throughout the loan tenure. This is mainly due to paying off some principal right away in advance. However, it requires a larger initial payment, which may not be feasible for everyone. The interest rate for advanced EMI options might be slightly higher compared to arrears EMI.

Arrears EMI (Standard EMI)

In this option, the borrower starts making EMI payments at the end of the first month after loan disbursal. Unlike the above, the first EMI includes both principal and interest.

The benefit of this option is a lower initial payment compared to advanced EMI. Borrowers might also find a slightly lower interest rate offered for arrears EMI. However, they end up paying more interest overall as the principal amount is not reduced upfront.

Which option Is Better?

Advance EMI is suitable for those with funds for a larger down payment who want to save money on interest in the long run. On the other hand,

Arrears EMI is ideal for those who need to keep their initial payment low and are comfortable with higher interest payments.

However, before choosing the option, it is always better to compare loan offers from various lenders and understand the specific terms for both EMI options.

Image by Akshya Gupta from Pixahive (Free for commercial use / CC0 Public Domain)

Image Published on September 10, 2020

Image Reference: https://pixahive.com/photo/emi-written-with-scrabble/