Flexible EMI reimbursement options can burn a hole in your pocket
“Due to the pandemic, those returning to work want to travel with the vehicle they own instead of taking public transportation or app-based taxis,” said Aditya Mishra, Founder and CEO of Switchme.in , a platform that helps borrowers transfer their home loans to other financial institutions.
In order to tap this market, Maruti Suzuki India Ltd, the country’s largest automaker, has partnered with HDFC Bank Ltd to provide a flexible offering IEM options to new car buyers.
Flexible loan repayment structures can work for those who have experienced wage cuts and expect their wages to be restored once things normalize and the lockdown is fully lifted. Once their wages were restored, they would be able to pay regularly EMI.
The bank offers three repayment options for borrowers who may be facing a cash shortage.
Of the three programs, two focus on lower EMIs in the first few months. The first scheme combines the progress payment and the lump sum payment whereby the EMIs are initially lower and increase later during the term of office. Under the HDFC Bank program, the initial IME is as low as ₹1,111 by ₹1 lakh for a loan period of 84 months.
The second option allows borrowers to pay lower EMIs for the first six months (for employees) or three months (for self-employed). In this case, the IME starts at ₹899. The third is a flexi EMI system, where the borrower can choose lower IMEs for three months each year for the life of the loan.
These structures also increase the eligibility of borrowers as the initial EMI is lower, based on which the loan amount is decided.
Flexible repayment structures come at a cost. “They’re similar to a moratorium that a borrower uses on a loan. When there is no payment or lower payment for a few months, the interest portion is added to the principal and interest is charged on it. So the total expense goes up, ”said Deepesh Raghaw, Founder of PersonalFinancePlan, a registered investment advisor at Sebi.
Under the mark-up option offered by various banks, the EMI is lower for part of the initial loan term and then increased thereafter. Lenders generally target young professionals for these loans, given their potential for future income, which also allows them to take a higher loan amount. Suppose a borrower takes out a loan from ₹7 lakh and pay an EMI of ₹8,000 for the first three years, and ₹14,603 for the next four years. Here the borrower will end up paying ₹42,920 additional interest expenses compared to a regular IME (see graph).
Under the lump sum repayment structure, the borrower initially pays a lower IME and makes a large lump sum payment towards the end of the loan. It is among the repayment methods where the interest outflow is much higher compared to other repayment structures. “Balloon works for those who receive bonuses every year and can make a large payment all at once,” said Gaurav Gupta, CEO of MyLoanCare, an online lending marketplace.
A combination of step-up and ball can be difficult for borrowers to analyze. This also results in higher output at a later stage.
What should you do
Every benefit has a cost. If your cash flow is not affected by the pandemic, it is best to stick with the regular repayment method.
Flexible structures can only work for you if you are certain that your income will be restored in a few months. However, there have been layoffs and there is a lot of uncertainty about the impact of the foreclosure on businesses and the economy. “When in doubt, borrowers should absolutely avoid taking on any new responsibilities,” Ragaw said.
“A low three-month IME works for those with higher spending in certain months like March and April, where people make tax-related investments and pay tuition,” Gupta said.
If you think this works for you, be sure to ask for a loan schedule and see if your cash flow can meet the requirements. Also negotiate a discount on a car and see if it works better for you.
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