When is your salary due?

When is your telephone bill due?

Yes, what you are thinking is right, typically it is the “END OF THE MONTH”

If the answer is the end of the month, then why are some HFCs collecting EMIs for the month at the beginning or throughout the same month?

Is this practice fair on you?

Let us take an example:

You have taken a loan of Rs 20 lakhs for 15 years at 8% p.a. The loan is fully disbursed on 15th December and your monthly EMI is 19,113. Your EMI starts from the month after your loan is fully disbursed so from 15th to 31st of December you pay PRE-EMI and your EMI starts from 1st of January but will be due at the end of each month, in this case the first EMI is due on 31st of January.

But in case of frontloading of the EMI, it is collected at the start or anytime during the month of January.

i.e. Taking the same example above, the EMI in this case will be due on 31st of January. That means you are paying interest on the principal as on start of the month but is collected say on 12th January in advance, and you do not get credit for the principal.

Why are lending institutions choosing this as a practice?

And I am sure RBI needs to curtail this practice.

While this approach offers benefits in terms of cash flow consistency, risk mitigation, and operational efficiency, it is essential for lending institutions to balance these advantages with the financial well-being and preferences of its borrowers.

Ensures that by the time 31st January comes along, a significant percentage of EMIs for January have been already collected, albeit earlier than its due dates.

Makes the delinquency numbers look good at month end.

However, this is not correct! Simple questions…

Would you pay your EMI ahead of due date and not get credit for principal paid and therefore pay interest on that principal for a few days?

Food for thought for all stakeholders – lenders, regulators, and consumers.

This ends the 3-part series which highlights some practices followed by the housing finance industry!!

RBI, please take note of this.

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