Buying costly stuff on EMI is a very convenient method of not emptying your pockets at once. But it comes at a heavy cost. Banks charge high interest rates (and processing fees for some banks) on these EMIs and hence, many people generally stay out of buying products on EMI. This is why the e-commerce companies lose out on many potential buyers. They came up with an offering called ‘No Cost EMI’ which basically, enables the buyers to pay the exact price of the product using EMI over a few months instead of paying all at once. For example, instead of paying 12k for a product at once you need to pay just 2k every month for 6 month, which totals to only 12K.
On September 17, 2013 the RBI released a circular to ban the Zero percent EMI by saying the following:
“In the zero percent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to customer in the form of processing fee. Similarly, some banks were loading the expenses incurred in sourcing the loan (viz DSA commission) in the applicable RoI charged on the product. Since the very concept of zero percent interest is non-existent and fair practice demands that the processing charge and RoI charged should be kept uniform product/segment wise, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting the vulnerable customers. The only factor that can justify differential RoI for the same product, tenor being the same, is the risk rating of the customer, which may not be applicable in case of retail products where the RoI is generally kept flat and is indifferent to the customer risk profile.”
So basically, banks are banned from offering zero-interest rate EMIs. So how can they offer No-cost EMI? Are these EMIs really ‘no cost’ or they have a hidden cost behind them. I’ll discuss the pros and cons of No Cost EMIs.
How No-cost EMI works?
Let us say you have to buy the new mobile phone Samsung Galaxy M51 from Amazon which costs Rs 24,999. You have 2 payment options to buy the phone:
- Pay all the amount at once (Rs 24,999), or
- Buy it on EMI (say 12 months). A purchase of Rs 24,999 using a credit card having an interest rate of 15% pa will cost you Rs 2,256 per month for 12 months. Which means, you would pay Rs 27072 which includes the principle amount of 24,999 (the price of the phone) and an interest component of Rs 2,073. The interest component will also incur an extra 18% GST, which takes the total amount paid over a period of 12 months to Rs 27,445.
If you are not in a mood to spend Rs 24,999 in one go, you’d probably end up not buying the phone because of the huge extra amount (Rs 2,446) which you would be paying.
What if someone gave you a deal: Okay, instead of paying Rs 27072 (+GST) pay a total of only Rs 24,999, but not all at once. Pay it in EMIs over a period of 12 months.
Wouldn’t you be happy and thrilled and the businessman inside you will fly for cracking such a sweet deal? 😉
What the e-commerce companies do is the same, they adjust the bill amount of the product to an amount which, at the normal rate of 15%, will cost a total of Rs 24,999 only, if paid in EMIs. So, if you buy the same phone discussed above on No cost EMI, you’d be charged Rs 23,081 on your card which on a 12 month EMI at 15% interest rate will cost you approx. Rs 2,083 per month. Hence making it a ‘no-cost’ EMI since you would have to pay only Rs 24,999 (+approx. Rs 400 GST).
Banks are agnostic of the ‘no-cost’ part of the EMI. They don’t even know that the transaction is a no cost EMI with a product price of Rs 24,999. They see the order as a normal EMI with a product price of Rs 23,081.
So far so good, right? Let us see few scenarios and understand whether ‘no-cost’ EMI is always beneficial?
Scenarios using No-cost EMI
Scenario 1: Normal order (Happy case)
As with the example discussed above, you buy a Rs 24,999 mobile phone for Rs 2,083 per month for 12 months. Good deal, you got the phone without paying anything extra (apart from approx. Rs 400 as GST).
Scenario 2: Cancelled order
Let us say you bought the phone, used it for 15 days and had to return it because of a defect. You got the refund for Rs 23,081 (the billed amount). In such case, many banks charge you interest for the number of days the EMI was active. So, if you kept the phone for 15 days, you’d have to pay approx. Rs 150 as interest charges. Remember, you paid the interest without actually buying the phone. So, it turns out to be a loss making deal. Some banks may waive off this extra charge if the bill is not yet generated. I know for sure Amex waives off the charge if bill is not generated, but in case the bill is generated, they don’t refund the interest charges.
Scenario 3: Pre closed EMI
You bought the phone, got charged Rs 23,081 and you pre-close the EMI after 10 days. Now, your total outstanding balance will be Rs 23,081 (plus approx. Rs 100 for 10 days’ interest). If you pre close the EMI, you’d have to pay only Rs 23,081 (plus approx. Rs 100 interest), and not the full amount of Rs 24,999. Some banks charge one time non-refundable processing fee for EMIs and some banks charge money for pre-closing the EMI. So, you might still end up paying a good amount in fees instead of the interest amount.
Based on the 3 scenarios, we can safely say that No cost EMI can be a good and convenient mode for normal purchases, but it may come back and bite you with the interest if you need to return the product.
To summarise, here are the benefits and drawbacks of No-cost EMIs:
- You get the flexibility to buy expensive utilities which you cannot afford to buy if you have to pay the full amount at once.
- Paying the same amount in instalments does not leave a huge dent on your pocket.
- You still have to pay GST on the interest part. However, this amount will be too tiny to be noticed.
- You may end up losing money without buying anything if you return the product.
- It encourages you to do impulsive purchase for products you ‘want’ but may end up not buying if you have to pay the full price at once.
Buying a phone worth Rs 48k by paying all at once? No since it will set me back by Rs 48k.
Buying a product worth 48k by paying Rs 4k for 12 months? Definitely yes, Rs 4k a month would not be that much of a problem.
- Some banks might charge you a fixed non-refundable processing fee for the EMI, so you still might end up paying a good amount in fees instead of the interest.
Should you use No-cost EMI?
It depends. If you are buying stuff and are likely to return it, you should go for a lump sum payment. If you cannot afford a lump sum payment for a product and it is not a necessity, then you probably should wait until you can afford it, you should wait until you are able to afford it. Don’t do impulsive buys just because you are getting a product on discount or no-cost EMI.
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