EMI in advance vs. EMI in arrears

Banks and HFCs offer myriad loan schemes to attract and retain customers and turn a profit in the competitive loan sector. The schemes vary the loan repayment methods, interest rates, interest rate types (ex: floating, fixed, dual rate) etc. Each scheme comes with its own terms & conditions and appeals to individual needs of different types of customers.

EMI in advance (aka Advance EMI scheme) is a common feature of car loans offered by most banks in India. In this scheme, you agree to make a payment of one EMI in advance to the bank. Generally banks deduct this amount from the loan amount disbursed to the car dealer. This difference amount gets added to the margin money that you owe to the dealer. Note that the entire advance EMI amount goes to reduce the principal loan amount. Subsequent EMI payments are counted towards both the principal and the interest parts of the car loan.

On the other hand, EMI in arrears (aka Standard EMI OR Arrears EMI scheme) does not require you to make any advance EMI payments to the bank and the entire loan amount, minus the one-time charges & fees, is disbursed.

To illustrate with an example, let’s compare the scenarios of borrowing a car loan in Advance EMI vs. Arrears EMI scheme.

Car: Hyundai i10
On Road Price: ₹ 4.5 lakhs
Car Loan you applied for: ₹ 3 lakhs
Loan interest rate: 12%
Loan Tenure: 36 months
Processing Fees: ₹ 3,000

EMIDisbursed Loan Amount (Applied Car Loan Amount – Processing Fees – Advance EMI)Down Payment (Car Price – Disbursed Loan amount)Total cost of the car (Down Payment + (EMI * No. of remaining EMI payments))
Advance EMI Scheme (A)₹9,866₹ 3,00,000
– ₹ 3,000
– ₹ 9,866
= ₹ 2,87,134
₹ 4,50,000
– ₹ 2,87,134
= ₹ 1,62,866
₹ 1,62,866
+ (₹ 9,866 * 35)
= ₹ 5,08,176
Arrears EMI Scheme (B)₹9,964₹ 3,00,000
– ₹ 3,000
= ₹ 2,97,000
₹ 4,50,000
– ₹ 2,97,000
= ₹ 1,53,000
₹ 1,53,000
+ (₹ 9,964 * 36)
= ₹ 5,11,704
Difference (A – B)₹98 less₹ 9,866 less₹ 9,866 more₹ 3,528 less

Note: The above calculation rounds off all numbers to their nearest full rupee amount. Otherwise, the difference in total cost in this example is ₹ 3551.40.

Benefits of Arrears EMI scheme is reduction in initial down payment. If you can afford to pay advance EMI, you should opt for it. If budget is a constraint, then you should go for Arrears EMI.

Loan APR

In this example, its also important to note that the loan APR is 12.69% under the ‘Arrears EMI’ scheme vs. 12.74% under the ‘Advance EMI’ scheme. i.e., the bank’s internal rate of return (IRR) is higher under the ‘Advance EMI’ scheme when processing fees and other charges are taken into account.

The above article has been updated on 13-Sep-2013 after our reader Netesh Thukral pointed out mistakes in the original article. Thanks Netesh.

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