Everything you need to know about no-cost EMIs

Retailers often advertise no-cost EMIs (equated monthly instalments) to purchase high-cost products such as laptops, phones, refrigerators and other consumer goods, which some people may find difficult to pay for in one go. In such situations, an EMI option, especially a no-cost EMI might be a lucrative option for buyers to consider. The option is different from the regular EMI option that sellers typically provide.

What are no-cost EMIs?

Retailers and e-commerce platforms let you purchase a high cost product by paying in monthly installments, like you would in a regular EMI. However, in this option, there is no interest charge levied on the customer. In essence, you pay the actual cost of the product in an EMI format. “No-cost EMI is an ecosystem between a retailer, bank and the customer. All three parties benefit from this scheme. The customer can purchase high-cost products and pay for them in monthly installments without any additional interest cost, the bank receives a new source of income and the retailer shares a portion of its margins with the bank and the retailer gets increased sales in high-cost product categories," said Abhishek Saxena, co-founder Eroute Technologies, a card-based, consumer-centric payment company.

How does a no-cost EMI work?

Contrary to its phrasing, no-cost EMI customers do end up paying some cost depending on the pricing of the product. Retailers who tend to offer this scheme typically offer two options to customers:

Equating discount to interest on EMI: If a customer were to receive a certain discount for making an outright purchase of a product, in a no-cost EMI option the retailer offers the same product for full price with an EMI option. This gives the flexibility to pay the price of the item on a monthly instalment basis.

For example, if a customer wishes to buy a ₹15,000 worth mobile phone. If the customer is likely to get a discount of say 10% and pay ₹13,500 should he or she wish to purchase the product outright, in the no-cost EMI option, the retailer does not give a discount to the customer and instead the customer pays the entire price on a monthly installment basis under the tag of No Cost EMI. Essentially as a customer you forgo the discount in exchange for a flexible payment option and choose to pay the full price for the product.

Interest is built in: Sometimes retailers build in the interest component into the actual price of the product and present a no-cost EMI for customers to take advantage of the flexible payment option.

For example, the retailer is willing to sell a mobile phone for, say, ₹15,000 and provides the option of no-cost EMI to a customer. Then, depending on the interest charges levied by the bank on this amount (in this case it is ₹1,500) the retailer will add this amount to the selling price and present the retail price as ₹16,500 ( ₹15,000 + ₹1,500). Thus, the customer gets to purchase the same item at ₹16,500 under the tag of no-cost EMI even though there is a charge levied by the bank.

Thus in both cases while you as a customer feel you are buying a product that you cannot afford as an upfront payment, in reality some interest component and additional charge is built into the price you are paying.

Advantages of no-cost EMI:

No-cost EMI offers the customer the option to manage his or her cash flow constraints when purchasing high value goods. “We have a young and dynamic population that has more exposure, is earning more and constantly wants to upgrade their lifestyle. No-cost EMIs help people buy aspirational products that are of high value by paying in instalments," explained Saxena. Opting for No-cost EMIs will also help you build your credit history by taking smaller loans provided you pay your EMIs on time.

Limitations and disadvantages of no-cost EMIs:

Like any scheme, no-cost EMIs, too, have various terms and conditions. Here are a few disadvantages of this EMI option.

# Not all retailers and banks provide no-cost EMIs. In fact, such offers are only applicable on specified products.

# Some schemes are applicable only if you have a credit card.

# You might have to pay a processing fee for some purchases. Banks also charge service tax and other applicable taxes for the transactions.

# In case you return the product and get a refund, you will still end up losing money on interest.

# In case you don’t repay an EMI on time, your credit score gets impacted.

Thus, understanding the terms and conditions and fine print is the key to making the most of the no-cost EMI. Remember that in almost all cases you are paying the full price of the product, plus the taxes and other charges as may be applicable. “Though no-cost EMIs help a consumer buy products that are unaffordable as a downright payment, it is important for consumers to not go overboard and buy products that are only a status symbol. Just because a product is available on EMIs does not mean you buy it, even though it is not within your means. Youngsters should opt for such schemes to buy useful products that add value to their lives”, concluded Saxena.

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