Personal Loans, Car Loans, Housing Loans and Loan against Property are taken by the public from banks and financial institutions. Even after regular repayment of pre-defined equated monthly instalments, at the end the banks inform that the loan is outstanding. The bank customers feel cheated and file consumer complaints. This article explains how to protect against such unwarranted extra demands by the banks.
What is equated monthly instalment
EMI is the loan instalment which is calculated by the banks and term lending institutions after interest is pre-loaded to the principal loan amount with the assumption that monthly loan instalment will be paid regularly every month without any default (or even prepayment) so as to liquidate the loan in full.
How is EMI calculated?
EMI depends on the following factors :
Loan Amount say: Rs. 500000-00
Rate of Interest % per annum say: 12% p.a.
Compounding Factor say: Monthly (RBI Guidelines)
Repayment Period say: 120 months
Repayment Terms (M/Q/H.Y./Y) say: Monthly (M)
One can calculate the EMI online from any of bank's official sites like SBI EMI Calculator. However the formula for EMI calculation is given below to cross check the online calculator:
EMI = (Equated monthly instalments)
M = Loan period in months
I = [Interest rate per Annum / 12] / 100
L = Loan amount
* = to the power
. If we apply the formula in the above case, it will work out as under:
M (Loan period in months) : 120
I (Interest rate per Annum / 12): (12/100) / 12 = 0.01
L (Loan amount) : Rs.5, 00,000
EMI = [(5, 00,000 x .01) x (1 + .01)*120]/[(1+.01)*120] = 7174-00. EMI, as per formula works out to same that is Rs.7174-00 as per online calculator and the individual has to pay the bank in 120 months EMI X Period in months = (7174 X 120) that is Rs. 8,60,880-00. Thus total interest payable will work out to be (Total payment – Loan amt.) Rs.3, 60,880-00.
Right to information – interest rate, insurance and moratorium period
Moratorium period - How to calculate home loan and educational loan equated monthly instalment
Home Loan equated monthly instalment
Home loan can be taken either for outright purchase of constructed house when equated monthly instalment will start immediately as in case of personal or car loan. But if home loan is taken for construction of a new house then the banks provide moratorium period during construction period with a maximum of 18 months. There can be two possibilities in such cases. Either the borrowers repay the interest during construction period or the interest gets added to the principal of the loan component.
In the first case after the construction period during which the interest is repaid/serviced, the loan account will show a balance equal to principal loan amount say Rs.5,00,000-00 in the above case but the repayment period will get reduced by the moratorium period say maximum 18 months and remaining repayment period will be 120 – 18 = 102 months and EMI will have to be calculated for 102 months so as to avoid penalty due to default resulting into outstanding loan even after payment of all equated monthly instalment. To protect against such default read the repayment terms and conditions in the term loan agreement entered into with your bank
In the second case where the borrower opts for not servicing/repaying interest during the moratorium or construction period – the monthly compounded interest gets added to the principal increasing the principal amount of loan by interest so added. In the above case if the interest of say Rs.100000-00 is added during construction/moratorium period of 18 months then the borrower will have to repay Rs.5,00,000-00 + Rs.1,00,000-00 = Rs.6,00,000-00 in 120 – 18 = 102 months and the borrowers will have to get the EMI set accordingly so as to avoid penalties and sign the repayment terms and conditions in the term loan agreement accordingly with their bank
Also check interest subsidy and subvention allowed by Reserve Bank of India on home loans as in case of loans to exporters and farmers.
Educational Loan equated monthly instalment
Similarly moratorium period is allowed in respect of educational loans during the period of completing studies and gap period in getting employed with maximum ceiling on gap period. The parents or the borrower have the option to service or repay the interest during study and gap period.
On employment or completion of maximum gap period, whichever occurs earlier, the borrower can get the EMI calculated for the agreed repayment period for the principal amount and if the interest is not repaid/serviced during study or gap period the EMI can be got calculated for the total amount of Principal + Interest added during the study and/or gap period.
On educational loans interest is not compounded and is charged on simple rests. Moreover many banks allow one percent rebate in rate of interest if interest is service/repaid during study and gap period.
Also check interest subsidy and subvention allowed by Reserve Bank of India on educational loans as in case of loans to exporters and farmers.
What to do if interest rates change during the moratorium period or repayment period
Moratorium Period :Interest during moratorium can be easily checked by the borrower even if the interest is repaid/service or added/loaded to the principal loan amount and EMI can be got fixed accordingly.
Repayment Period :The borrower needs to contact the bank to know the outstanding liability on the date of increase/decrease in rates of interest. On the date of change of rate of interest the remaining repayment period in respect of outstanding liability will decide either the increase/decrease in the EMI, if repayment is not to be disturbed or the increase/decrease in the repayment term, if EMI is not to be changed. In both the scenario the borrowers must obtain a letter from their bankers.
How to cover cost of insurance and costs other than interest
Banks levy charges like processing fees, documentation fee and bank's approved architect-cum-value fees, bank's advocate fee, inspection charges, cost of insurance etc. in respect of home loans.
The borrowers must request for recovering such charges from their saving fund accounts so that there is no adverse effect on the EMI calculations and the borrowers do not get lost into complicated calculations.
While bearing the cost of insurance in respect of newly/old built house the bankers get the property insured for their full valuation by the bank's approved value whereas the cost of land/plot added in the total valuation need not be got insured as fire, earthquake or any other natural calamity cannot do any harm to the land. The total valuation includes the cost of land/plot as the major part of the valuation.
Insurance in respect of house property must be taken for the full term of the loan along with life cover so as to cover any eventuality. In case of prepayment of loan policy must be taken back from the bank, got re-endorsed in favour of the borrower, if to be retained or refund of premium from insurance company if it can be surrendered for remaining period as companies allow policies to be surrendered on quarterly basis.
Life Insurance must be obtained by the student borrowers while taking educational loans. LIC policies with very low premium during study and unemployment period with high value term assurance are offered by Life Insurance Corporation of India.
The difference of low premium charged during study and unemployment period is loaded in the premiums for the remaining period of insurance. This will not only insure the parents during the study/unemployment period against any eventuality but the higher premiums after the student gets employed will plan for the income tax related investments under section 80CC along with income tax rebate u/s 80E.
Article by Ashok Goyal Ashok Goyal joined ISC in 2012. He is Leading CIBIL Consultant in India after having retired as Chief Manager from Punjab National Bank, Experienced Blogger and Adsense Publisher.
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Comments from Author:
1. Check you Home Loan account regularly for insurance charge and insist for copy of Insurance Policy from the Bank to ensure that it covers all insurance risks but excludes the value of the land and Land the loss can occur to building only and Insurance Companies in connivance with the financial institutions insure the house property for their full value that is including the cost of land.
2. If you are eligible for interest subsidy for Housing Loan or Education loan, ask your lending institution to provide the value dated credit so as to reduce the burden of interest.
3. Always keep mirror account ( Mirror account is loan account prepared in advance by assuming that you are regular in your EMI's so as to critically examine the difference between the actual loan outstanding and loan outstanding as per Mirror Account.
4. Ask the Bank to charge and recover all charges except interest to the debit of your saving account so as to avoid charging of penal interest without any default on the borrower's part.
5. In case of vehicle loan it is always advisable to transfer the no claim benefits being available on your old vehicle to be transferred to New Vehicle to cut heavy costs of insurance of your new vehicle without loosing any benefit and you may take only 3rd party or nominal value policy in respect of your old vehicle.
In case you repay the loan in full you have full right to cancel your insurance policy except the 3rd Party, mandatory under Motor Vehicle's Act and claim back the premium amount on pro rata quarterly bais.
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