EMI loans have become so common and popular now that many people don’t even know about the existence of EMI-free loans. Unlike EMI loans, they have variable repayment amount through the loan tenure and provide greater flexibility in terms of repayment. For some cases, these EMI –free loans make better sense than the conventional EMI once. Here we will tell you what exactly EMI-free loans are and what are their advantages and drawbacks.

EMI-free loans explained

To understand this concept, let us first touch upon the meaning of EMI loans. EMI stands for Equated Monthly Instalment. In an EMI loan, the repayment of interest and principal is computed for the entire loan tenure and then evenly apportioned over the months in such a way that every month the borrower needs to pay the same amount which is composed of both principal and interest amount.

EMI free loans on the other hand are a complete departure from equated monthly repayment. They give borrower an option of paying only interest portion and also the flexibility of paying bulk principal amount either in a single or multiple instalments as and when there is fund availability. This means lower burden of monthly repayment since amount of pure interest payments are much lower than an EMI. On the other hand, if you compute the overall liability related to interest then it will come out to be more than EMI loan since the principal remains outstanding on this kind of loan for a long time and interest needs to be paid on full principal unless part or full repayment of principal is made. The interest payment from month to month remains same and whenever any payment towards principal is done, new interest is calculated there from.

Now that we have explained the concept of EMI-free loans, let us discuss their advantages and disadvantages.

Advantages of EMI- free loans:-

1.Low repayment burden as monthly instalment consists of interest only;

2.Principal can be repaid anytime during the loan term, as and when there is adequate cash flow with borrower;

3.There are no prepayment charges or penalty if borrower pays off the entire loan before the agreed loan tenure;

4.If bulk payment of principal is done in the initial period then it would lead to significant savings on interest;

5.Since the repayment burden is lesser and there is flexibility on principal repayment, borrower can budget better for his other financial commitment;

6.This loan is beneficial for those borrowers who are expecting abundant cash flow in future but needs to bridge a current gap in the fund availability.

7.Low monthly repayment can be leveraged to take a bigger loan.

Disadvantages of EMI-free loan:-

1.The overall amount of repayment including interest is high on EMI-free loans unless principal repayment is done in the initial period;

2.Since Principal repayment is in the hand of the borrower, there is a big risk of an EMI-free loan ending up as debt trap if principal remains unpaid for a long time;

3.EMI-free loans are not suitable for people who like to budget their monthly costs due to element of uncertainty.

4.If a borrower is not expecting abundant cash flow in the near future, then it is wise to go for EMI loan.

These were the pros and cons of availing an EMI-free loan. Recently SBI introduced EMI-free loans under home loan category that are more akin to Pre-EMI. The loans are made keeping salaried class in view but would remain EMI-free only for the first 3-5 years; thereafter EMI would have to be paid by the borrower.

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