X buys a smartphone worth Rs. 50,000, but instead of paying the entire amount at once, he opts for a six-month EMI, and now he has to pay Rs. 8,333.34 monthly for the next six months. That way, X became the owner of the phone but made payments as per his monthly financial budget. This is known as EMI.?
An EMI is named after equated monthly instalments (EMI) where you break your payment into multiple parts and pay those parts in a monthly cycle called an instalment.
The main reason behind opting for an EMI is that people¡¯s wants are unlimited, but they don¡¯t have adequate money to buy them at once, so they choose the EMI option so that they can purchase the products but pay a small sum of money every month till they have made the full payment. So, in short, EMI offers you the comfort of stalling your current payments. But why would banks give you this comfort of paying in small chunks??
The answer is ¡®interest rates/charges¡¯. Banks charge interest on EMI payments, which can be as low as 1% or as high as 20% or even more. In the above example, Rs. 8,333.34 is just the monthly instalment, but if you include the interest that X has to pay to the bank, it will go up. So, EMI might be a good scheme for banks to earn money, but it is a trap in the name of comfort for people who are unaware of the interest rates or non-payment disclosure.
Despite everything, this EMI option has become an upward trend in the market because people are getting lured by what is known as ¡®No-cost EMI¡¯. Yes, the term is pretty self-explanatory. No-cost EMIs are those payments where you can opt for payment in small chunks but won¡¯t be charged any interest rate by the banks. So, you purchase a product/service, and now you don¡¯t have the money to pay the full amount to the merchant or let¡¯s say you don¡¯t want to pay all the money right away, but neither do you want to pay interest. So, you choose the no-cost EMI option. If you have a credit card, this becomes easier for you.?
Now, this allows flexibility in payment and budget planning. Wow! That sounds great, right? But, wait, wait, wait, there must be some catch here. Why would banks give away these benefits just like that? So, let¡¯s explore no-cost EMI to its core.
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Zero Interest Charges: The absence of interest charges is the key benefit. Traditional EMIs include interest on the principal amount; however, no-cost EMIs do not, making the transaction more affordable.
Budget-Friendly: It aids in the management of monthly budgets. Because the total cost is divided into monthly instalments with no additional fees, it is easier to budget spending without straining financial resources.
Increased Affordability: No-cost EMIs can make costly things more affordable. High-value things, such as electronics or furnishings, become more affordable when the cost is spread out over time without the burden of interest.
Credit Score Enhancement: EMI payments are noted in your credit history. On-time payments of no-cost EMIs can aid in developing a positive credit score.
No Down Payment: Often, no-cost EMI agreements do not demand a down payment, which reduces the buyer¡¯s initial financial strain. Customers typically have the option of choosing the tenure of their EMI, allowing them to select a time that corresponds with their financial planning.
Quick approval and simple processing: No-cost EMI solutions are frequently associated with little documentation and quick approval processes, making the purchasing process quick and easy.
Avoiding Large One-Time Expenses: It assists in avoiding a large one-time cost, which can be very important in conserving liquidity for other essential expenses or emergencies. Customers can take advantage of bargains and special offers without paying the entire amount upfront, maximising their spending power.
No Hidden Fees: Generally, no-cost EMIs are transparent, with no hidden fees, as long as the terms and conditions are properly understood.
No-cost EMI can be availed either through a no-cost EMI card issued by any finance company or through bank credit cards, and getting a no-cost EMI card or a credit card is as easy as chewing gum. This ease has induced consumers to try this feature once and then make them addicted to it.
Nowadays, brands have started giving EMI options on almost everything from travel to services, forcing the consumer to shift towards paying smaller sums of money rather than a big chunk at once.
The Buy Now Pay Later (BNPL) scheme is becoming the most dangerous thing today, leading people to opt for EMI options.?
Now, let us understand the implications or distress that no-cost EMI can cause:
If you have taken a loan anytime, you must know that the loan is repaid in two parts: one is the principal amount (the amount of which the loan is sanctioned), and the other is the interest you pay to the bank on the principal amount. No-cost EMI is the same as a loan but at no cost (without interest). In this, you just have to pay the principal, and that too in parts, and no interest has to be paid for it. The finance companies provide this facility to boost their revenues and profits as no-cost EMI promotes impulse buying.
For example, Shalini¡¯s monthly salary is Rs. 70,000. She has just moved into a new home and wants to purchase an air conditioner, television, refrigerator, washing machine and microwave. The conclusive price of all these comes to Rs. 1,50,000, and Shalini only has Rs. 20,000 extra this month, which she can use to buy the above products. So, she can purchase only one item a month with this given scenario. But, she also has an alternate option of purchasing all items simultaneously and converting the payments into a no-cost EMI. Now, she can convert it to a 3-month, 6-month, 12-month or 24-month payment cycle. She chose no-cost EMI, and now she will have no other option but to make payments for the next couple of months, but it is not sure that she will have the amount to make that payment every month. What if she is unaware of a medical emergency or any other extra spending in the coming months? She only has Rs 20,000 at her disposal every month, and the rest is spent on running the household.?
As you can see, this lure of no-cost EMI has trapped Shalini into opting for it. Now her salary, after excluding all her living expenses, is gone for 24 months, and even if she doesn¡¯t have anything to pay, she will have to pay the EMI because non-payment of EMI can come with hefty interest rates, which can go as high as 40% too. Now, if Shalini needs any emergency funds in these 24 months, she will have to borrow them from somewhere because her savings are going towards EMI. This loop will continue forever, and eventually, Shalini will end up in a debt spiral.
So, for the wise, no-cost EMI can be a good way of buying products or increasing their credit scores. Still, customers who tend to overspend might find themselves in the web of monthly instalments and eventually in a debt spiral.
Higher Product Price: Retailers may occasionally boost product prices to cover the interest charges they pay to banks. As a result, you may end up paying more for a thing than it is worth.
Product Selection Becomes Limited: Some products may not be eligible for no-cost EMI. Retailers may only provide this plan on certain items, restricting your options.
Impact on Credit Limit: The EMI amount is deducted from your credit limit. This limits your available credit, which may be detrimental if you require credit for other emergencies or expenditures.
Temptation to Overspend: The availability of easy EMI choices might lead to hasty purchasing decisions, enticing consumers to acquire products they don¡¯t need or can¡¯t afford in the long term. For example, you want to purchase a phone with a budget of Rs. 30,000, but you will see advertisements that a newly launched phone of Rs. 40,000 can be purchased through no-cost EMI of just Rs. 4,000 per month for the next 10 months. This will induce you into buying a higher-priced product even though you were Rs. 10,000 short in your budget.
Hidden costs: Despite being billed as ¡®free,¡¯ certain EMI plans may have processing costs or other hidden fees that are not immediately apparent.
Criteria for Eligibility: Not everyone may be qualified for no-cost EMI choices. Your credit score and history frequently determine eligibility and failure to fulfil these criteria can result in rejection.
Complicated Terms and Conditions: These schemes frequently feature complex terms and conditions, such as fines for pre-closure, late payments, and so on, which can add to the cost if not adequately understood.
Dependence on Credit Cards: Because no-cost EMIs are often attached to credit cards, you won¡¯t be able to use them if you don¡¯t have one or if your card isn¡¯t suitable.
Financial Discipline: Effective EMI management necessitates financial discipline. Failure to arrange your funds might result in missing payments, which attract fines and harm your credit score.
If you think no-cost EMI benefits you, then you should know that by choosing the no-cost EMI option, you are letting go of the upfront discount that you would have gotten had you paid in full, which means you end up paying interest for the no-cost EMI indirectly.
For example, during Amazon¡¯s Great Indian Sale (the Diwali sale), you have finalised to purchase ¡®Smartphone Z¡¯, the price of which is Rs. 40,000, which, after applying the bank¡¯s card discount of 10%, will effectively cost you Rs. 36,000. But, if you apply for no-cost EMI, the bank will process it on Rs. 40,000, and the 10% additional bank discount is gone. Hence, the total cost of the smartphone after choosing no-cost EMI will be Rs. 40,000, while that of a one-time payment will be Rs. 36,000.
Also, the merchant (Amazon, Flipkart or any other business from where you buy products) doesn¡¯t charge you anything for a no-cost EMI. Still, banks always charge a one-time non-refundable processing fee while processing the no-cost EMI. This amount can vary from Rs. 200- Rs. 500, which might not be significant for the consumer purchasing the product but is another way for the credit card or finance company to earn.?
The amount seems less for one consumer, but for banks, it becomes profitable as lakhs of consumers opt for no-cost EMI and pay this processing fee, which is a huge straight profit for these financial institutions. Obviously, the consumer is also paying an additional amount; as mentioned earlier, they lose the discounts, too. So, banks and merchants take a win here.
Credit Score
These above cons are limited until the final settlement of the EMI plan, but the main disadvantage is that if you fail to pay the EMI at any point, it will severely affect your credit score. The credit score talks about a person¡¯s loan repayment capacity.
When you apply for a loan from a bank, the bank checks your credit score before giving the loan and deciding the interest rate on that loan. The higher the credit score, the easier the processing of the loan and the lower the interest rate on the loans, and vice versa. So, if in the future you want to apply for a loan, be it for any purpose, business, home, vehicle, etc., and your credit score is low, the banks will hesitate to give you the loan, and even if they sanction the loan, they will charge higher interest rate than that of the market.
Although no-cost EMI doesn¡¯t have such benefits except for the comfort of payments, it can be beneficial if proper checks and balances are maintained while opting for it:
Don¡¯t ever make impulse buying: Try to differentiate between your needs and wants. Just because you get something at a discount doesn¡¯t mean you need that product. Just because no interest is charged from you doesn¡¯t justify purchasing that product. Set your financial goals straight, and you can avoid impulse buying.
Take care of your budget: If you have a budget of Rs. 20,000, then never increase your budget for that product by even a rupee just because you don¡¯t have to pay for it immediately. Always think twice before purchasing any product. Eventually, the burden of those extra bucks will fall on you. Let¡¯s say you opted for a 4-month repayment of Rs. 20,000 under no-cost EMI. Here, your EMI will stop after four months, but if you go out of your budget, then you will have to pay for more than four months, right?
Opt for No Cost EMI only if you have savings of 3x the amount of product you are purchasing on no-cost EMI: If you opt for no-cost EMI of a product valued at Rs. 50,000, make sure you at least have Rs. 1.5 lakh in your bank account so that there is no liability for the product on your family members. This hack will prevent you from paying heavy interest to the finance companies for delays in the settlement of dues.
Set your instalments aside if you¡¯ve surplus funds: If you already have the amount ready before the payment date, set it aside by keeping it in short-term FDs or with your trusted people. This way, you are in the safe zone and don¡¯t have to worry about spending that money on anything else.
Anything that comes easily or for free (no cost) is never good for you unless you know how to handle it. So, if you are a finance expert, can manage your expenses and budget well, or want to build a good credit score. In that case, no-cost EMI is the best deal for you, but apart from that, you should always refrain from entering not only into no-cost EMI options but into any type of loan scheme.?
If you don¡¯t have money to pay for the EMI for at least the next three months, don¡¯t even think of opting for no-cost EMI because failure to pay the instalment on the due date will bring havoc in the form of interest charge on you.
Recently, the Reserve Bank of India (RBI) suspended Bajaj Finance from disbursing loans under ¡°ecom¡± and ¡°insta EMI card¡± due to some non-compliance. So, RBI is slowly tightening and taking cognisance in the financial sector to protect ignorant consumers. Such actions by RBI are a clear indication to consumers to slow down on opting for and falling prey to such schemes.
So, plan and spend wisely. Always avoid impulse buying and remember nothing comes for free. Plan your purchases!
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