Going through advertisements, making a list, comparing deals and offers. With the festive season on, the retail pull is strong. The best and simplest way to buy a product is to pay cash. It could even get you a discount, meaning you buy at the lowest cost possible. But if you find your cash stretched, there’s plastic to the rescue. Now, you have the option of paying back in equated monthly instalments (EMIs). But does it make sense to do so?
Four options
Illustration: Raajan / Mint
A credit card purchase may be cleared in four ways. One may pay off the entire outstanding amount by the due date without revolving any credit and thus avoid paying any interest. This also gets you an interest-free period of up to 45-51 days. Another way is to pay off the mandatory 5% of the outstanding amount each month or the minimum amount due and keep rolling over the balance. But this could be expensive—you would have to pay an interest of about 3% each month and the new purchases made during the subsequent months wouldn’t get any interest-free period.
The third option is to opt for “balance transfer” of the outstanding amount and save on interest charges. The fourth option is to convert the entire purchase into EMIs. If used well, this can work in your favour.
EMI facility
This allows you to pay back in instalments. The advantage is that you pay an interest rate of about 1.5-2% each month, against the normal interest rate of about 3%. In addition, even if all the dues are not cleared, one still gets the interest-free period on new purchases.
The facility is similar to a personal loan. The difference is that the rules for personal loans are stringent and there is a documentation process. The EMI route avoids paperwork and the waiting for approvals. Your existing card gets you the loan and you simply start paying the EMIs.
Moreover, you know exactly how much you would need to pay each month. If the amount is not huge, it works better than a personal loan.
Different arrangements
Not all credit card-issuing banks offer separate EMI cards. But most banks do offer the option even on an existing non-EMI card. Check with the bank if your card has this facility. For example, HDFC Bank credit card holders have to call the bank to check if the EMI conversion offer exists on their cards. Certain merchant establishments have a tie-up with HDFC Bank and you can convert purchases from these places into EMIs if you buy using your HDFC Bank credit card. On the other hand, Axis Bank’s Gold Plus card allows you to convert any amount above Rs5,000 into six, 12 or 24 instalments.
The pay-back tenure varies across banks and types of cards, as do the minimum transaction amounts that can be converted (see Cost of instalments).
The cost
Each instalment, or EMI, will be equal to the principal amount of repayment plus the applicable interest amount. In most cases, you have to pay a one-time processing fee.