Interest Cycle

All Banks & HFC’s will have a specific interest calculation cycle for the purpose of calculating the interest on the home loan disbursed to customers. Ex: 1^st of every month till end of month or 5^th of every month till the 4^th of the next month etc.

In the marketplace most Banks and HFC’s will have their interest cycle from month beginning to month end.

On the last day of the interest cycle the bank will charge interest to your loan account. The same interest amount will then be recovered from the EMI that you pay the next month, and the balance amount of the EMI will be adjusted against the principal.

So, that being the case, the EMI repayment dates should normally be immediately after the interest cycle. Anytime between 1^st to 5^th of the next month would be the ideal choice.

The setting of the EMI date closer to the end of the interest cycle is beneficial for you financially.

Let’s look at an example – Rs 1 Cr loan for 20 years at 8.5% where the loan started on 1^st April 2024 and the repayment scheduled for 1^st day of every month starting 1^st May 2024.

This is how the schedule of payment will look like for the first 4 months.

End of 4 months the outstanding balance is Rs 99,35,523/-

Now imagine if you make the payment on 11^th of every month instead of 1^st of every month then for the first 10 days of every month the interest will be charged on the sum total of the actual outstanding principal and the unsettled interest of the previous month.

Interest on Rs 70833/- for 10 days will be approximately Rs 205/- at home loan rate of 8.5%. For 1 year this cost will be in the range of Rs 2460/-

This cost will keep coming down as you progress into your tenure. However, a cost is a cost and cost-saving can enhance your bottomline. Individuals or entities, it’s the bottomline figure that matters.

In order to avoid this cost, you can keep the EMI repayment date as close to the end of the interest cycle of the Bank/HFC you have selected.

The Bottomline: The best time to pay your EMI is any day between 1^st to 5^th of a month in Bank/HFC’s where the interest calculation cycle is month beginning to month end. However, adequate care should be taken so that the EMI’s do not bounce. Else, whatever cost savings you have had will get nullified by the Late Payment/EMI Bounce Fee.