Stress
of EMIs
Equated Monthly
Installments
“What are you more
scared of life or death?”
“EMI” said a corporate slave.
Nimisha Toshniwal
My daughter had
taken a loan of Rs12 Lakh from one of the Banks at the interest rate of 10% per
annum for a period of twenty years for an EMI of about Rs.11000 per month, for
making part payment for the house she had purchased. After about six years, being her father, asked
her to check up the total down payment of interest and principal she was
required to make to full and final payment to adjust the loan taken. When she
checked with the Bank it transpired to our shock that even after making payment
of Rs.11000x12x6 =Rs.7,92,000 being the amount of 72 monthly instalments paid,
she was required to pay Rs.12 Lakhs plus the interest due, if any, at the time
of final adjustment. Not even a single rupee of principal had been adjusted out
of payment of Rs.7,92,000 made to the Bank. What was this: was it a loot or
EMI: it appears pure and simple loot. Obviously it was not EMI, it was simply
the interest every month that she was required to pay and this defeated the
definition of EMI that this equated monthly payment compulsorily includes
principal and interest: this is prevalent world over. This is really criminal
breach of trust reposed by a customer in the financial institution.
A loan is a
financial agreement between two parties, a lender and a borrower. Under this
agreement, the lender gives a specific amount of money to the borrower with the
intent that the amount borrowed is paid back with interest as monthly
installments whether as EMI or otherwise or straight away lump sum with
interest, over a predetermined period of time by the borrower.
The easiest and most
transparent method is, divide the principal by the number of monthly
installments agreed to, add to it monthly simple interest at the agreed rate on
the balance outstanding at the first of each month. Thus amount of installment
and interest would reduce every month. If some more amount is paid in advance
it is adjusted against the principal and further reducing the interest burden,
no penalty for advance payment. Reduced amount of monthly installment gave
people real pleasure and a motivation to make the advance payments. This is
the traditional method followed by most
of the co-operative financial institutions like the Co-operative Thrift and
Credit Societies.
Above procedure
required the lender to calculate the amount of installment every month, so was slightly
cumbersome for them and costly too as they were required to employ somebody for
the purpose. Secondly the Banks’ income from interest reduced every month and
the prudent borrowers were able to settle their accounts earlier than the
period agreed upon. Whereas Banks wanted lesser work load with steady income.
Taking a cue from foreign financial institutions Banks and other financial
institutions introduced the Indian borrowers to the concept of Equated Monthly
Installments.
The benefit of an
EMI for borrowers is that they know precisely how much money they will need to
pay toward their loan each month, which can make personal budgeting a little easier.
This argument appears slightly logical but person’s life is managed not simply
on ease but on many other important considerations. In fact, a wise borrower
keep account of each and every penny of the loan taken and payment made
thereof. This is thus hollow reasoning in favour of EMI loan for a borrower and
runs counter to the well-established time tested principle that take care of
pennies, pounds will take care of themselves.
The benefit to
lenders is that they can count on a steady, predictable income stream from the
loan interest and many other additional charges levied on borrowers.
Steady and
predictable income stream prompted to the Banks to introduce the customers to
longer periods of repayments ranging up to 30 years practically the whole
productive life of an individual. In addition to interest the Banks also
started charging the processing fee for loans and also the penalty at the rate
of 2-3% of principal amount for advance payment of installments. Some Banks
also introduced charges for recalculations whenever the borrower paid more the
installments or lump sum amounts against the principal. The Banks also charge
for skipping installments and if one regularly skips the have the right to take
over the mortgaged asset. Some private financial institutions employ harsh
methods when taking over specially the moveable assets and socially it is a
stigma on the family and the borrower, in addition it reduces the
creditworthiness of the family. In case of immovable assets taking over of
assets is long drawn process, particularly when the builder takes time to
transfer the title, always a losing game for borrower causing all round stress and
financial loss. Thus the borrower has to behave in a straight line as a most
humble servant of the lender. Thus loans
became a more profitable for the banks.
System of Equated
Monthly Installments (EMIs) guarantees the lender to start with 90-95% of EMIs
as interest and the borrowers gets only 10-5% of EMI as adjustment of Principal
and this unequal position continues up 70-75% of the installments although
principal adjustment increases slowly with each installment, thus only last
30-25% installments are for more principal and lesser interest for the Bank.
Thus the borrower is always in disadvantageous position a great de-motivator
for early adjustment of amount borrowed.
People usually take
home loans on EMI. For a loan amount of Rs.30 Lakh @10% per annum for a period
of 25 years with EMI of Rs27,261 one would end at a total payment of Principal
and Interest of Rs.81,78,306 i.e.Rs.30,00,000 (Principal) + Rs.51,78,306
(Interest). Rs.51 lakhs is not a small amount when responsibilities of the
individual increase and you are required to discharge those responsibilities, one
is still paying installments of loans.
Most of EMI loans
are taken by the middle class and lower middle class to satisfy their hunger,
of being to look like the higher class, when they are actual middle class and
EMI still brings them lower, as such they are the greatest sufferers of EMI
system. Higher education of children and their marriages start solidifying
between one’s 48 to 55 years of age then he feels the pinch because by now his
career has reached its extreme- nothing more to gain but to continue with
whatever it is.
17 Years in SCHOOL,
5 Years in COLLEGE,
30 Years of 9 to 5
JOB,
Which you do not
like at all,
But Bank EMI of your,
2BHK Flat and Maruti
Swift Car,
Compels you every morning,
To dress up and
leave the home,
To work on someone
else’s dream,
By Killing your.
Is this the life you
deserve?
Dharmendra Katiyar
Banks calculate EMIs
right based on the amount of Principal, Rate of Interest and the Tenure of the
loan. But the individuals calculate EMIs
wrong, failing to understand that he is an individual and Bank is an
institution nothing personal to anybody but working on the principle of
maximizing its profits. Individual borrowers must calculate their EMIs keeping
in view their capacity to repay loan based on:
1. Present permanent income.
2. Continuity of
sources of income.
3. Future responsibilities
likely to arise during the tenure of EMIs like
children education, their marriage, parents
liabilities, self-issues like
transfer after completion of tenure,
medical issues, property expense
like stamp duty for registration,
maintenance charge, property tax etc.
4. Capacity to
repay: Carry home Income-expenditure-forced saving-
income tax.
5. Future additions
in the income.
6. Emergencies if
any.
Individuals must
avoid bigger loans and lower EMIs, a trap that makes an individual a slave of
the lender for thirty years. Lower rate of interest and longer tenure are the
traps that Banks and Financial Institutions lay for their steady interest
income. Govt is not far behind, they encourage reality sector EMI loans by
giving concessions in Income-Tax to those who buy the houses on loan. Since the
middle-class has already been squeezed of its savings, the housing sector is
feeling glut of build houses no body ready to buy them and now developers
provide allurements like no EMI for first six months, two air conditioners
free, a modular kitchen free, etc. Do not get trapped in these allurements all
of them are at the cost of the borrower in one way or the other.
EMI for studies
EMI for business
EMI for new house
EMI for daughters’
marriage
This how the middle
class spends his life
In paying EMIs to
see the happiness of their loved ones.
Tejaswini Chowdary
EMI is a noose select it carefully, lest it throttle you, your dreams, and enjoyment.
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