Is No- Cost EMI Really No-Cost?

Today we are going to talk about another scheme that is a scam for our savings, No-cost EMIs.

What is a No-Cost or Zero-Cost EMI?

 A no-cost EMI offers you a plan where you can pay for a product or service in affordable monthly installments with zero interest.

The merchants tempt customers with No Cost EMI on credit card offers. The offer seems to be permitting the customer to buy a product in interest-free monthly EMIs. Sometimes, they also offer a discount to convince you to go for No Cost EMI.

But the fact is, Credit Cards or e-commerce companies are not charity institutions. Nothing comes free and they are here to make a profit.

 These No-Cost EMIs are always tempting. They exist so that we buy things, spend money and spend some more money and keep on spending. Having the option to buy things and pay later on No- Cost EMI causes consumers to overspend. We want to buy as many things as possible and want to travel as much as we can as if ‘Kya Pata Kal Ho Na Ho.' As a result of Impulse spending, we end up spending 2.5 times more.

How does No Cost EMI on Credit Card works:

Suppose you want to buy a Television worth ₹ 40,000. The merchant gives you two options: Either you pay the money upfront or take a 3/6/9/12 months loan where the EMI will be ₹ 3,333 without any interest.

Sounds tempting enough? But there’s a catch.

What RBI says on No Cost EMIs:

According to the RBI, No Cost or Zero Cost, EMI schemes are simply meant to exploit vulnerable customers. RBI rules don’t allow zero-interest loans.

As per the RBI circular, “In the zero percent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to the customer in the form of processing fee.”

The truth behind Zero-Cost EMI:

From my personal experience, I realised that No-Cost EMIs are not zero-cost. EMI is basically a loan on which we have to pay interest. The e-commerce vendors either provide a direct discount or offer a cashback equivalent to the interest amount to make customers fall for the No Cost EMI offer.

But the truth is, customers actually need to pay 18% GST on the interest amount+ Processing Fees+ Interest. Effectively, if a customer buys a TV worth ₹ 40,000 under the six-month No-Cost EMI option, the interest that he would have to pay will be approximately ₹2,000 extra. That means TV worth ₹ 40,000 will cost ₹ 42,000 (9-10% per annum extra).

Nowadays, if the consumer doesn't opt for no-cost EMI, the store or the manufacturer may offer discounts or cashback on upfront payment of the full amount.

Buying in EMI gives the customer a false idea that he has money in his wallet, and he is inclined to spend it on unnecessary things. At the end of the month, he realises that he had overspent.

Pros of No-cost EMI

1. The ability to buy expensive things and services without paying upfront
2. Pay conveniently over a few months by buying a product in installments
3. The ability to choose the tenure according to your budget

 Cons of No-cost EMI

1. Cost of paying EMIs is higher than paying upfront
2. You have to pay a non-refundable processing fee for the EMI
3. You will have to pay additional GST on interest payable
4. You may end up purchasing expensive utilities that you want but don’t need

Should you choose No-Cost EMI?

 Like any other loan, the borrower needs to repay the no-cost EMI on time. If that does not happen, it can affect his credit score and impact his creditworthiness.

In my suggestion, No-Cost EMI is advisable only when you need to buy a product urgently and do not have the full amount to pay upfront. However, if you are purchasing it on an impulse, it is better to avoid it as it makes no sense to pay more than what you could have in the first place. We should rather think about our personal savings and future planning in those situations.

About the author:

Mohit Beriwala is the CEO of Shree Rama International, a financial advisory firm and the Founder of Shree Rama Managers LLP,a SEBI registered, Portfolio Management Service company.

He is an FRM, CFA & IIM B alumnus.

Since 2006, he’s been helping Entrepreneurs and Professionals  safeguard their assets and reach the goal they desire. When not working, he enjoys reading and playing with his son. He’s also a fitness enthusiast and a techie.

Mohit is actively involved in providing community services.

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