EMI: Meaning, Rate of Interest, Repayment Tenure, Late Fees

EMIs or equated monthly instalments are smaller denominations of a larger amount, formulated with an intention to decrease the burden of paying a lump sum at the user’s end while the lender financing the transaction earns a mutually agreed interest and a processing fee during the exercise of disbursing the amount on your behalf. 

What is an EMI? How can you avail it?

As already discussed, EMI are nothing but smaller chunks of the whole amount quoted by the seller for a product or a service that are payable in the future course. With the help of EMIs, most of the big-ticket transactions are converted into affordable instalments for the ease of customers as a person is not in a position to purchase a product if the cost price is more than the monthly income. 

EMIs were initially designed to accommodate large-ticket credit facilities, including home loans, car loans, loans against property, loans against gold deposits, loans against securities, etc. 

Why are people considering EMIs?

Over the last couple of decades, with the increasing penetration of credit cards, the introduction of small-ticket personal loans, payday loans, vacation loans, instant personal loans, the massive growth in the credit market and people’s willingness to purchase things on borrowed money, most of the transactions of even smaller sizes are being converted into EMIs. 

With the advent of credit products such as buy now and pay later, credit cards for lower income groups, short-term loans, and credit offerings from e-tailers, people find it extremely comfortable to purchase a costlier product by converting the cost price into smaller denominations by agreeing to the interest charges and processing fees levied by the lenders. 

At the end of the day, it seems a win-win for all the parties involved, as the consumer is able to get the product without paying the upfront cost, the seller is able to drive up the sales by offering the products on easy EMIs, no-cost EMIs, while, simultaneously, lenders are making money by financing the cost price on behalf of customer and earning interest for the services rendered. 

As most middle-class are spreading their big expenses into smaller EMIs in order to accommodate the cost price within their respective monthly earnings, people are increasingly buying the products on EMIs as it helps them to safeguard their periodic budgets. 

The easy-to-understand loan amortisation schedules, improved transparency in terms & conditions, stiff competition in the credit market with the presence of scheduled commercial banks (public, as well as private), the non-banking finance companies, digital lenders, neo banks, and fintech corporations, make it easier for the consumers to choose from the variety of offers from different market players. 

Rate of interest on EMIs

The applicable rate of interest on EMIs is purely subject to the profile of the customer and lenders’ discretion. You may be charged an interest rate that is applicable on a personal loan of a similar amount in case you are purchasing products that are tangible in nature but are highly likely to depreciate (other than vehicles) in the future course. 

Most of such EMIs are offered against a credit card, as with a credit card, you are already entitled to the credit limit that is offered to you by the bank. In some instances, the option of EMIs is also available on debit cards. Whereas if you are taking a personal loan separately to finance a purchase, then you can mutually select a bank that is offering a rate of interest and processing charge appropriate to your earnings. 

The rise of EMIs and pay later culture is so much so that fintech corporations are now partnering with third-party lenders to offer customised credit limits to the customers based on their credit score and repayment behaviours. With this, a person is rightfully equipped to avail of an EMI without a card, popularly known as the facility of cardless EMI. 

As a large section of youngsters and millennials doesn’t have a bank account or a credit card but are very tempted to purchase a gadget or a lifestyle product on EMI, they can opt for cardless EMIs. All such credit products have their respective benefits, as well as disadvantages. 

With the availability of buy now and pay later and cardless EMIs, a corporation can skillfully onboard an altogether new bunch of customers that are highly likely to spend on upcoming products, opening the channels of the credit market for new-to-credit individuals but, on the other hand, the possibilities of default are higher as compared to the people availing a home loan, a car loan or a gold loan. As a result of the high risk, the applicable interest rates are a notch higher for such customers. 

Repayment tenures

With the help of EMIs, the customers are qualified to service the debt payments in various terms. For short-term personal loans, EMIs on credit cards, buy now and pay later services, and EMIs offered by new-age digital lenders, the repayment tenure is much shorter than the EMIs offered on conventional credit products, including a home loan, a car loan, a loan against property, a loan against securities or a personal loan. 

Considering the online purchases with the help of credit & debit cards, cardless EMI facilities, credit wallets, small-ticket personal loans, payday loans, and buy now pay later, the repayment tenure for EMIs on these services usually ranges from 3 months to 36 months. The repayment tenure on premium credit and debit cards may escalate to 48 months for some prime customers. 

While on the other hand, the repayment tenure could go up to 20 to 25 years in the case of home loans, car loans, loans against properties, loans against gold, loan against PPF, loan against fixed deposits, loans against shares, and other secured lending facilities. 

Late fees and penalties

EMIs are simply the confirmed receivables for the lenders and financiers. The customers are advised to service the EMIs on time, but if they are not able to repay the loans on time, the late fees and penalties are also levied, over and above the interest charges. The structure of penalties varies from lender to lender, also subject to the nature of the credit facility. The late payment penalties are also applicable on government-ordered moratorium periods, so it is better you repay the designated EMIs on or before the respective due dates.