What is an EMI? Equated Monthly Installment. We usually associate this term with loan repayment. Every month, the same amount (and hence the word “Equated”) gets debited from your bank account and is used for loan repayment. A portion of the EMI goes towards interest payment and the rest towards the principal repayment. We have discussed how EMI based loans work in detail in this post.
But EMIs Are Not the Only Way to Repay a Loan
A loan repayment requires payment of interest and repayment of principal.
Now, any payment schedule that eventually pays off the entire interest and principal over the loan term is an acceptable form of repayment.
RBI regulations don’t allow lenders to be too creative with interest payments. Loan interest must be paid regularly and on time. Otherwise, the loan can become sub-standard.
But the lenders can structure principal repayments in myriad ways. By doing that, they can make it easier for you to repay the loan. However, you must note the cost of loan does not change by tweaking the principal repayment part. The cost of loan can go down only through one way. And that is by lowering the interest rate.
I came across a similar product (EMI-Free loan) from LoanTap, a fintech lending platform.
LoanTap: EMI Free Loan, Really?
Yes, no EMIs. Or equated monthly installments but you must still repay the loan.
In this product offering, you do not pay the principal every month. You pay only the interest on a monthly basis. You repay the principal every 3 to 6 months.
Let’s take an example.
You take a Rs 10 lac loan for 60 months. At 12% p.a. Let’s consider 3 cases.
- Regular EMI based loan
- LoanTap EMI Free Loan: Principal Repayment every 3 months
- LoanTap EMI Free Loan: Principal Repayment every 6 months
| Regular Loan | EMI Free Loan: Principal Repayment every 6 months | EMI Free Loan: Principal Repayment every 6 months | |||||||
| Month | EMI | Interest Payment | Principal Repayment | Total Monthly Payment | Interest Payment | Principal Repayment | Total Monthly Payment | ||
| 1 | 22,244 | 10,000 | – | 10,000 | 10,000 | – | 10,000 | ||
| 2 | 22,244 | 10,000 | – | 10,000 | 10,000 | – | 10,000 | ||
| 3 | 22,244 | 10,000 | 50,000 | 60,000 | 10,000 | – | 10,000 | ||
| 4 | 22,244 | 9,500 | – | 9,500 | 10,000 | – | 10,000 | ||
| 5 | 22,244 | 9,500 | – | 9,500 | 10,000 | – | 10,000 | ||
| 6 | 22,244 | 9,500 | 50,000 | 59,500 | 10,000 | 100,000 | 110,000 | ||
| 7 | 22,244 | 9,000 | – | 9,000 | 9,000 | – | 9,000 | ||
| 8 | 22,244 | 9,000 | – | 9,000 | 9,000 | – | 9,000 | ||
| 9 | 22,244 | 9,000 | 50,000 | 59,000 | 9,000 | – | 9,000 | ||
| 10 | 22,244 | 8,500 | – | 8,500 | 9,000 | – | 9,000 | ||
| 11 | 22,244 | 8,500 | – | 8,500 | 9,000 | – | 9,000 | ||
| 12 | 22,244 | 8,500 | 50,000 | 58,500 | 9,000 | 100,000 | 109,000 | ||
| 13 | 22,244 | 8,000 | – | 8,000 | 8,000 | – | 8,000 | ||
| 14 | 22,244 | 8,000 | – | 8,000 | 8,000 | – | 8,000 | ||
| 15 | 22,244 | 8,000 | 50,000 | 58,000 | 8,000 | – | 8,000 | ||
| 16 | 22,244 | 7,500 | – | 7,500 | 8,000 | – | 8,000 | ||
| 17 | 22,244 | 7,500 | – | 7,500 | 8,000 | – | 8,000 | ||
| 18 | 22,244 | 7,500 | 50,000 | 57,500 | 8,000 | 100,000 | 108,000 | ||
| 19 | 22,244 | 7,000 | – | 7,000 | 7,000 | – | 7,000 | ||
| 20 | 22,244 | 7,000 | – | 7,000 | 7,000 | – | 7,000 | ||
| 21 | 22,244 | 7,000 | 50,000 | 57,000 | 7,000 | – | 7,000 | ||
| 22 | 22,244 | 6,500 | – | 6,500 | 7,000 | – | 7,000 | ||
| 23 | 22,244 | 6,500 | – | 6,500 | 7,000 | – | 7,000 | ||
| 24 | 22,244 | 6,500 | 50,000 | 56,500 | 7,000 | 100,000 | 107,000 | ||
| 25 | 22,244 | 6,000 | – | 6,000 | 6,000 | – | 6,000 | ||
| 26 | 22,244 | 6,000 | – | 6,000 | 6,000 | – | 6,000 | ||
| 27 | 22,244 | 6,000 | 50,000 | 56,000 | 6,000 | – | 6,000 | ||
| 28 | 22,244 | 5,500 | – | 5,500 | 6,000 | – | 6,000 | ||
| 29 | 22,244 | 5,500 | – | 5,500 | 6,000 | – | 6,000 | ||
| 30 | 22,244 | 5,500 | 50,000 | 55,500 | 6,000 | 100,000 | 106,000 | ||
| 31 | 22,244 | 5,000 | – | 5,000 | 5,000 | – | 5,000 | ||
| 32 | 22,244 | 5,000 | – | 5,000 | 5,000 | – | 5,000 | ||
| 33 | 22,244 | 5,000 | 50,000 | 55,000 | 5,000 | – | 5,000 | ||
| 34 | 22,244 | 4,500 | – | 4,500 | 5,000 | – | 5,000 | ||
| 35 | 22,244 | 4,500 | – | 4,500 | 5,000 | – | 5,000 | ||
| 36 | 22,244 | 4,500 | 50,000 | 54,500 | 5,000 | 100,000 | 105,000 | ||
| 37 | 22,244 | 4,000 | – | 4,000 | 4,000 | – | 4,000 | ||
| 38 | 22,244 | 4,000 | – | 4,000 | 4,000 | – | 4,000 | ||
| 39 | 22,244 | 4,000 | 50,000 | 54,000 | 4,000 | – | 4,000 | ||
| 40 | 22,244 | 3,500 | – | 3,500 | 4,000 | – | 4,000 | ||
| 41 | 22,244 | 3,500 | – | 3,500 | 4,000 | – | 4,000 | ||
| 42 | 22,244 | 3,500 | 50,000 | 53,500 | 4,000 | 100,000 | 104,000 | ||
| 43 | 22,244 | 3,000 | – | 3,000 | 3,000 | – | 3,000 | ||
| 44 | 22,244 | 3,000 | – | 3,000 | 3,000 | – | 3,000 | ||
| 45 | 22,244 | 3,000 | 50,000 | 53,000 | 3,000 | – | 3,000 | ||
| 46 | 22,244 | 2,500 | – | 2,500 | 3,000 | – | 3,000 | ||
| 47 | 22,244 | 2,500 | – | 2,500 | 3,000 | – | 3,000 | ||
| 48 | 22,244 | 2,500 | 50,000 | 52,500 | 3,000 | 100,000 | 103,000 | ||
| 49 | 22,244 | 2,000 | – | 2,000 | 2,000 | – | 2,000 | ||
| 50 | 22,244 | 2,000 | – | 2,000 | 2,000 | – | 2,000 | ||
| 51 | 22,244 | 2,000 | 50,000 | 52,000 | 2,000 | – | 2,000 | ||
| 52 | 22,244 | 1,500 | – | 1,500 | 2,000 | – | 2,000 | ||
| 53 | 22,244 | 1,500 | – | 1,500 | 2,000 | – | 2,000 | ||
| 54 | 22,244 | 1,500 | 50,000 | 51,500 | 2,000 | 100,000 | 102,000 | ||
| 55 | 22,244 | 1,000 | – | 1,000 | 1,000 | – | 1,000 | ||
| 56 | 22,244 | 1,000 | – | 1,000 | 1,000 | – | 1,000 | ||
| 57 | 22,244 | 1,000 | 50,000 | 51,000 | 1,000 | – | 1,000 | ||
| 58 | 22,244 | 500 | – | 500 | 1,000 | – | 1,000 | ||
| 59 | 22,244 | 500 | – | 500 | 1,000 | – | 1,000 | ||
| 60 | 22,244 | 500 | 50,000 | 50,500 | 1,000 | 100,000 | 101,000 | ||
| Total | 1,334,667 | 1,315,000 | 1,330,000 | ||||||
As you can see, with a regular personal loan, you pay the same amount every month.
However, in the other two loans, you pay only the interest every month. And principal at regular intervals. Since only interest must be paid every month, the burden is lower in the months when you don’t have to pay the principal installment. But the burden is much higher in the months when you must pay the principal installment.
Points to Note
- The cost of loan in all three cases remains the same at 12%
- You pay similar amounts overall for all 3 loans. In fact, in this case, you pay the most in a regular personal loan. Why? Because the pace of principal repayment is higher in EMI free loans. In reducing balance loans, as we know, the principal goes down gradually at the start and expedites towards the end.
About LoanTap EMI Free Loan
- Loan amount of 50,000 to Rs 10 lacs
- Minimum age: 21 years. Minimum monthly income of Rs 30,000
- PAN Card, Salary slips, Salary bank account statement (3-6 months), Address Proof
- Flexibility to choose tenure from 6 to 60 months.
- Processing fees: 2% plus applicable taxes
- Flexible Repayment options: You can choose principal repayment frequency (3-6 months)
- The website mentions “No foreclosure charges” after 6 months. Partial prepayments and foreclosure (outside the payment schedule) are allowed with nominal charges within 6 months.
Who Will Find These Loans Attractive?
You need a loan, but you know you will struggle to pay full EMI. But you are expecting an annual bonus or commission or variable pay (or money from somewhere) every few months. In such cases, you may find merit in these kinds of repayment structures. You get a little more breathing space.
For instance, in the above example, regular loan had EMI of 22,244. EMI Free loan required payments of 10,000 in the first few months. Hence, less pressure.
But in months where you must pay principal, you pay much more than the regular EMI option. You will have to consider all these aspects.
Frankly, I would prefer my finances to be robust enough so that I do not have to spend time mulling over which type of loan to take.
Also, note I have considered the rate of interest to be the same for the 3 types of loans. That may not be the case. Plus, we are talking about short duration loans. Do pay attention to non-interest charges such as processing fees.
Further Reading: LoanTap
Author’s Disclosure: I have never borrowed from LoanTap. I have not done much research about LoanTap or its lending or recovery practices either. I just wrote about their product because I found the repayment structure interesting. I have read a lot about online lending malpractices. While I am not (and should not be) equating LoanTap with such fraudsters, you must do your own research about the company before borrowing from them.