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Home >Money >Personal Finance >The truth behind no-cost EMIs

NEW DELHI: There's nothing as satisfying as having your cake and eating it too. No-cost EMIs (equated monthly instalments) come closest to the experience for customers looking to make an expensive purchase.

No-cost EMIs provide the customers with the double advantage of buying a product on instalments instead of making the entire payment up-front without paying any additional interest for making the payment in instalments.

However, unlike the name suggests, there is no waiving off of the interest in case of a no-cost EMI. "A no-cost EMI is subsidised or discounted either by the manufacturer or the merchant," said Adhil Shetty, CEO, Bankbazaar.com.

The merchant or the manufacturer bears the interest rate, which is an additional discount for the buyer.

Suppose you want to buy an airconditioner costing Rs42,000. The merchant offers you two option. Either you pay the money upfront or take a one-year loan where the EMI will be Rs3,500.

Assume the interest rate for such a loan is 18%. In this case, the customer would have to pay 4,207 as interest on a one-year loan. Instead of the customer paying the interest cost, either the store or the manufacturer bears it. Either of the two will pay the interest money to the lender.

A no-cost EMI is always tempting. However, there are a few factors you need to keep in mind before you opt for it. There could be restrictions.

"Not all products would be available with a particular merchant or be covered under this scheme. The manufacturer or the store may decide to push a specific model under the plan. There is a possibility that if the consumer doesn't opt for no-cost EMI, the store or the manufacturer may offer discounts or cashback, and they may not be available if the buyer purchases the goods on loan. In some cases, you may have to pay a processing fee, which is an additional cost," said Shetty.

Like any other loan, the borrower needs to repay the no-cost EMI on time. If that does not happen, it can affect your credit score and impact your creditworthiness. So, unless you are sure about your ability to repay your loan, do not opt to buy products on no-cost EMIs.

(Do you have personal finance queries? Send them to mintmoney@livemint.com and get them answered by industry experts.)

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