Advantages and Disadvantages of EMI: Pros & Cons

A facility known as Equated Monthly Instalment, EMI is one that a borrower offers to a creditor. The creditor is required to make a set monthly payment every month. Both principle and interest amounts are covered. The loan expires once the EML is finished. You can purchase anything on EMI, including a cell phone, smart TV, appliances, an apartment, a car, etc. The facility makes it easier to repay a loan in installments rather than all at once. Despite having obvious advantages and being promoted by financial institutions, EMIs are still largely unknown.

This page offers a thorough explanation of everything there is to know about EMI, including both its advantages and disadvantages. The term “full EMI” describes payments that include both the principal and interest. Pre-EMI, on the contrary hand, refers to paying only the interest. The borrower has the option to pay only the interest portion of the loan at the time of disbursement in order to avoid starting the repayment period. Pre-EMI payments are not taken into account when calculating loan tenure because they are made before payback.

EMI

What Is The EMI’s Process?

It is a particular type of payment agreement between the lender and the borrower. Borrowers receive one set of installments per month under the EMI arrangement. Since the amount is predetermined, borrowers are aware of what they must pay. It facilitates their financial planning. In contrast hand, the lender receives a regular payback plus interest.

Factors that have an impact on interest rates and EMI

The following are the primary EMI-influencing factors:

Principal Amount

  • The principal Amount in the EMI is directly related to the primary amount and is based on it. Therefore, the EMI will be greater the higher the principal.

The interest rate

  • The amount that banks or other non-banking financial firms┬ácharge for a loan is known as the interest rate. A number of variables, including the borrower’s credit history and profile, affect the rate.

Advantages of EMI

Here are benefits of EMI:

  • Freedom to Purchase Expensive Utilities: EMI allows consumers the opportunity to purchase expensive utilities that they would not otherwise be able to. EMI enables you to purchase everything and anything, including pricey furniture, a car, wedding gifts and jewelry, and a home. Customers buy the product and take advantage of the advantages since they have the option to divide the cost into manageable monthly installments. This benefits merchants and traders as well as customers who purchase such expensive utilities. EMIs are similar to a wishbone for the average person.
  • Easy on the wallet: The borrower can choose the EMI plan to pay back the loan in regular monthly installments. The sum is established based on the principal loan amount, loan length, interest rate, and borrower’s repayment capacity. This makes it simpler for lenders to make monthly payments of the specified amount. They can therefore afford a variety of pricey utilities without having to cut back on their monthly spending.
  • Banks’ Flexible EMI Options: Today, many banks give borrowers flexible EMI choices. The EMIs are changed and chosen based on the borrower’s needs. The borrower chooses the installment and term based on what is most convenient for them.

Disadvantages of EMI

Here are some drawbacks of EMI:

  • Extended Debts: The borrowers must make monthly payments, or EMIs, until the principal balance and the appropriate interest rate have been satisfied. These periods might be as long as twenty to thirty years for personal or house loans. Therefore, a borrower must pay back loan installments for almost half of either his or her lifetime. This prevents the borrower from acquiring any other similarly opulent utilities in the near future.
  • No Early Repayment: Banks do not provide a simple option for borrowers who seek to repay a loan earlier than planned using additional savings or a bonus. Such debtors are subject to early repayment costs from many banks and NBFCs. Even if they could, this makes it challenging for the debtors to repay the loan earlier.
  • Charges for Skipping EMIs: Banks and NBFCs impose late fees on borrowers who forget to pay an EMI on or before the due date. Banks & NBFCs have stringent rules regarding EMI repayment. Multiple missed EMIs may result in legal action being taken against the borrower, or the bank may confiscate the collateral.
  • Additional Charges: The borrower is required to pay interest on top of the actual amount borrowed. The borrower is obligated to pay this extra sum since the principal balance and interest rate are added together to create an EMI.

Also Read: Why Bajaj EMI Card Transaction Got Declined By the Bank?

Conclusion

EMI offers benefits and drawbacks for customers, as we discovered in the article above. Although EMI is easy on the customer’s wallet and produces a smooth payment, it will consistently result in greater payment. When determining your ability to repay a loan, it is always important to study the tiny print of the agreement and use an online EMI calculator.

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