Home / Money / Personal Finance /  Zero-cost EMI may sound attractive but it actually comes at a price

No-cost EMIs are loan products that allow you to pay for a purchase over time, without paying any interest. While this may sound attractive, superficially, in reality you do pay a cost. Generally, this cost comes in the form of forgoing a discount that you would have otherwise received on the goods or service in question.

Typically, a regular EMI option means the monthly repayment of the product cost is combined with principal and interest. Raj Khosla, founder and MD, MyMoneyMantra.com, said that a no-cost EMI card makes a pre-decided credit limit available to the customer to convert his purchases into EMIs. Since interest is indirectly included in the no-cost EMI by charging a higher price, there is no additional charge for the interest. The Reserve Bank of India (RBI) released a circular in 2013, clarifying that zero per cent interest or no-cost EMI is non-existent, i.e. in no-cost EMI schemes, the interest amount is bundled in the product’s price," Khosla said.


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How it works

When you buy a product on no-cost EMI, the merchant bears the annualized interest rate. Adhil Shetty, CEO, BankBazaar.com, says, “Say you are buying a refrigerator worth 1 lakh. Under a 6-month EMI plan at an interest rate of 12%, your interest will come to 6,000. In case of a no-cost EMI, your bank charges this interest, but the merchant provides it to you as an upfront discount at the time of your purchase, effectively making it a no-cost EMI. However, not all no-cost EMIs are actually no-cost. You may be charged this amount as a processing fee in some cases. In other cases, you may be eligible for additional offers by making a lump sum payment. Bear in mind; you will still need to pay 18% GST on the interest to the bank."

If you were to offer to pay the merchant the total price of the refrigerator upfront, you may be able to get it at a discounted price of 94,000 in this example. Hence, it would help if you read the fine print of the terms and conditions of a no-cost EMI card and check the tenure, processing fee, and pre-closure charges before selecting it.

Sachin Vasudeva, associate director and head of credit cards, Paisabazaar.com, said, “Though it is called a ‘no-cost’ EMI option, there are still certain costs attached to it. The interest component can usually be seen as a discount in your bill when you opt for such a no-cost-EMI scheme. However, certain sellers may sometimes build the interest cost into the product’s actual price. In that case, you end up paying the interest cost despite opting for a no-cost EMI facility, thus nullifying your benefit of saving on the interest cost for your purchase. So, before buying through a no-cost EMI scheme, it’s best to compare the prices of the product at multiple platforms and stores, especially if it’s a high ticket purchase."



Navneet Dubey

Navneet Dubey is a personal finance writer and artist. Over the past decade, he has written feature stories on insurance, financial planning, lending and borrowing.
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