Asset financing is one of the fastest growing products in the finance sectors of most countries. The purchase of cars is one of the aspects that are driving the trends of asset finance. Car loans and Equated Monthly Installments (EMI) are among of the products available in acquisition of cars. The provision of these products varies with the options customized to favor particular clients depending on their cash flows. In addition, the products have been developed as a marketing and customer retention strategy by the financial institutions.
The Equated Monthly Installment (EMI) is a payment plan that requires fixed monthly payments from the borrower to the lender. The payments are to be made at a specified date of the calendar month. The payment pays off both the interest and principal of the loan in monthly intervals over a specified period until the loan is paid in full. Purchase of car through EMI requires that the car’s value and interest be paid off in regular monthly installments. The borrower is not expected to pay in excess of the agreed monthly installment.
Car loan involves borrowing of money to purchase a car. The sum borrowed amounts to the value of the car and allows the borrower to pay for the car in full. Interest is levied on the sum borrowed and an agreed time within which the principal and the interest is to be paid in full is made. The lender expects that within the stipulated time, the borrower will have cleared his or her debt in full. Car loans do not have strict rules controlling the payment plan. The borrower may make varied amount in monthly payment provided the minimum value is exceeded.
Unlike ordinary payment plans, EMI plans do not allow the borrowers to pay in excess of the agreed fixed monthly payment. The process of acquiring an EMI car payment plan involves identifying whether the monthly installment will be made in advance or in arrears. EMI in advance requires that a prior installment be made to the bank by deducting the amount from the loan disbursed to the car dealer. On the other hand, EMI in arrears does not require an advance payment to the bank thus the principal and interest are higher. Once the choice is made one-time charges and associated fees are paid then the sum is disbursed to the car dealer.
The main advantage of EMI is that it works on a fixed amount of money to be paid once a month. The scheme is convenient for budgeting. However, what does not meet the eye about the scheme is that it is expensive. Compared to car loan, EMI is expensive and is insensitive to economic fluctuations. The scheme is also punitive because it holds the borrower in a prolonged financial relationship with the bank that prevents the borrower from accessing other financial opportunities. The fact that the loan repayment cannot be expedited makes the borrower obliged to loan over the specified period. Meanwhile, you can acquire your car and a provisional driving licence.