Home loan EMIs: Beware of your last instalment

An EMI is a fixed amount paid by the borrower to the lender, every month, over the tenure of the loan.

But for those who have made part-prepayments on the loan and have chosen to keep the EMI constant, there may be a surprise.

The last payment instalment instead of being the same as earlier instalments should be a lower amount.

This is because the final payment is a balancing figure - comprising only the principal amount outstanding the month before, along with applicable interest.

Let's consider an example. Say, you had taken a loan of Rs 20 lakh for 15 years at the rate of 10 per cent a year.

Paying an EMI of Rs 21,492, the outstanding principal at the end of 14 years would be Rs 2,44,462. At this point, assume you prepay Rs 50,000 but keep the EMI same at Rs 21,492.

The outstanding principal will reduce to Rs 1,94,462 and the remaining tenure of the loan declines from 12 months to around 10 months.

At the end of the 9th month (just before the last instalment), the principal outstanding will be only Rs 9,540.

This, along with the interest cost of Rs 79 works out to an instalment due of Rs 9,619 in the 10th month, much lower than the EMIs for the earlier months (Rs 21,492).

There have been instances of lenders charging the same EMI amount in the last instalment even in cases such as those mentioned above.

This results in borrowers paying much more than warranted. In the example above, the same EMI in the 10th month as in the earlier months translates into the borrower paying a total of Rs 2, 06,335 as principal payment in the 15th year against the principal outstanding of Rs 1, 94,462. Paying more than what is due is not logical.

Settle before last instalment

Borrowers should be alert and bring such discrepancies to the notice of lenders.

Better still, borrowers should consider settling the outstanding principal soon after the penultimate EMI payment, to avoid the possibility of being overcharged in the last instalment.

Another alternative is to change the EMI amount after the part-prepayment, such that the remaining liability is evenly spread over the balance tenure. For instance, in the case above, a change in the EMI amount to Rs 20,349 at the beginning of the 15th year would translate into the outstanding principal being settled in the same 10 months without the borrower being overcharged. In essence, if the borrower partly prepays but changes the EMI accordingly, she can avoid the risk of paying more than warranted in the final instalment.

The problem of excess payment in the last instalment also does not arise when the borrower settles his loan according to the originally agreed payment schedule, without making part-prepayments in between.

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