Is loan EMI deducted on the month an advance payment is made?

POSTED BY Chethan S ON January 1, 2013 4:33 pm COMMENTS (5)

I have a housing loan with Syndicate Bank. I have made it a practice to make pre-payments at regular intervals to save on interest amount. The bank deductes EMI amount on 31st of every month (~₹14k). However if I make an advance payment (be it through NEFT or visit to the bank) the situation is different:

  1. Say I make an advance payment of ₹10k someday of the month, only the difference amount is deducted on 31st i.e., ₹4k as EMI.
  2. If I make a payment of ₹30k someday the amount is adjusted for three month EMIs, i.e., no EMIs are deducted on 31st.

In my opinion the advance payments must be considered separate and EMI deduction must happen in addition to the advance amount I had made. On enquiry bank officials informed me that my interest component gets reduced as the amount remitted will automatically reduce the outstanding loan amount.

Are the bank officials right in saying that interest component would go down accordingly? I would like to know what is the practice followed by other banks before taking the matter further. Do they deduct EMIs despite of advance payments?

5 replies on this article “Is loan EMI deducted on the month an advance payment is made?”

  1. Pratheesh says:

    I have taken a loan from my company of Rs. 40000/-. For last 2 month the company is deducting Rs.10000/- per month as emi. But this month (June 2016) I need to do some urgent piece of work and dont want the company to deduct the EMI for this month. Please suggest me a request mail format so that i can send it across my management and get the same approved before the slalry is processed.

    1. Sorry, this is not the right place for this question. You just have to draft a very normal mail for your issue. Nothing extraordinary is required

  2. Chethan S says:

    Recently I got an opportunity to interact with the branch’s chief manager who explained me things in detail.

    I was told that there are two ways to prepay home loans – advance payment and part-payment. By default payments made to loan account other than EMIs are considered advance payment (may be only by Syndicate Bank). This according to them is for customer’s convenience as they have seen cases where a customer deposits a lump sum into his loan account and often finds it difficult to pay that month’s EMI later, which leads to unnecessary complications! In line with this argument, my deposits to loan account were being considered as advance payments resulting in non-deduction of EMIs!

    The EMIs are deducted only if I explicitly ask them to consider the amount as part-payment.

    In both the cases the deposit made goes towards reducing the outstanding principal instantly. Only difference is, in case of advance payments loan tenure won’t go down as EMIs don’t get deducted till the advance payment amount becomes NIL. To illustrate this below are some sample calculations:

    Sample Calculations for Advance payment scenario
    EMI: 10k
    Advance payment: 50k

    Day Credit Oustanding principal
    Jan 30 10k (EMI) 860000
    Feb 5 50k (Advance) 810000
    Feb 28 Nil 815300 (This amount goes up as interest amount gets added)

    Similarly, for another four months there won’t be EMI deduction (till 50k becomes zero).

  3. Chethan S. says:

    Sanjay, to answer your queries:
    1. Monthly EMI comes to ~₹14k, taking total to ₹160k+/year.
    2. The total loan amount is ₹10L, tenure ten years, interest 10.50%. The loan is less than a year old as of now.
    3. House is occupied by my parents and I stay in a different city in a rented accomodation.

    In the montly statements, the bank refers to ~8k as interest and rest as principal.

    I’m not sure as to what should I tell bank authorities to consider the amount as pre-payment now. Though I insist them to treat the amount as pre-payment they use the word advance payment and say both are same! Once I send the payment the total outstanding amount reduces by that amount.

  4. Sanjay says:

    1. What is your Annual Loan EMIs? Is your House self occupied or let out? This is important to know before you try to make prepayment. What is your Home Loan Int rate?
    2. If your annual Interest component is less than Rs 1.5L, House is self occupied then you should NOT prepay your Home loan. It also depends on your IT slab also.
    3. If Hous eis let out, then full interest is allowed as deduction from Rental income in addition to Std Deduction of 30% + Proprty Tax, Society charges etc. So again you shouldn’t Prepay.

    But answer to Q1 is reqd before a correct inference is drawn.

    Lastly, For prepayment, you need to separately pay the money through a different payment process whereby the prepayment amount reduces Outstanding Principal. The way you are prepaying is not the correct way & it will NOT affect your Principal.

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