Does It Make Sense To Go For 'No Cost' EMIs?

¡®No cost¡¯ EMIs. What comes to your mind when you come across this term? Surely, the thought of paying credit card EMIs without incurring any ¡®interest¡¯ cost is the most natural one, right?

After all, this term seems to perfectly fit our idea of buying something conveniently through EMIs and on top of that, without incurring any 'cost' for the same. Right?

That's exactly why this term has created a lot of buzz over the past few years. But everything isn't as simple as it appears to be!

Wondering How?

If you are amongst those who keep on ticking off something or the other from your bucket list by availing these ¡®no-cost EMIs¡¯ on credit cards, or are keen to do so, then just pause and read this out.

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More Of A Marketing Gimmick

The term ¡®zero or no cost¡¯ EMI is a misnomer. The entire aura surrounding ¡®no cost¡¯ EMIs camouflages the actual meaning of no cost EMIs. It hides the most important truth about these ¡®schemes¡¯, i.e. the ¡®interest¡¯ and even other associated costs like GST and processing fees, all of which are passed onto you, the customer, in some way or the other.

Simply put, no-cost EMIs are just a marketing gimmick to lure customers, and the ¡®actual cost¡¯ is seldom visible or understood by the credit card consumers.

Even the RBI (Reserve Bank of India) has not once but in fact twice tried to alarm us as consumers, to beware of these schemes. Firstly, in the year 2013 and then again in 2017, the RBI said that these zero percent EMI schemes are non-existent, as the interest component is camouflaged and eventually passed on to the customer in numerous hidden ways.

So, the entire aim of these schemes is to lure consumers towards availing the ¡®easy and convenient¡¯ option of purchasing something on EMI, and that too supposedly ¡®no cost¡¯, hence giving you the sense of fulfilling your wish to own something which is otherwise unaffordable for you if required to be paid as lump sum.

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The Supporting Force Behind No-Cost EMIs

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Most of the online shopping portals, partner merchants, partner stores and lenders (banks, credit card issuers etc.) have been actively pitching these ¡®no cost¡¯ EMIs to grab hold of consumers. Some even tend to offer ¡®additional¡¯ discounts, cashbacks etc to those who opt for the no cost EMI option.

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How Is It Not A ¡®No Cost¡± EMI?

Whenever you go ahead to purchase some product on no cost EMI, you often come across a mention saying that the interest cost would be credited back to your or even sometimes offered as a discount. Isn't it? This is the most common way of offering the ¡®no cost¡¯ EMI. Upon seeing that amount equivalent to interest cost being credited back or given as discount makes you think that the entire cost of this scheme is zero, and all you pay is the purchase price of the product, right. But its not as clear and simple as it is made to look.

Firstly, keep in mind that the interest cost does not disappear. It is just borne by the merchant or manufacturer, and you as the buyer of the product/service repays the purchase cost. And it is sometimes noticed that the interest cost, whose amount is either credited back to you or offered as ¡®discount¡¯, is often the discount you could have got on top of that purchase cost if the amount was paid in lump sum instead of EMI.

So, that interest cost, of say, ?1,500, could instead have been availed as direct discount on that product¡¯s purchase cost, which would have lowered your purchase price. So, by instead availing the no cost EMI option, you are often indirectly made to forego that additional discount otherwise offered to lump sum payment customers.

Also, amidst the purchase price that you pay in EMIs, the retailer (like Amazon, Flipkart, Croma etc) gets the otherwise discounted price, and the rest, i.e. the 'discount amount¡¯ equivalent to the interest cost (like ? 1,500 mentioned above), goes towards paying the interest on the loan taken in the form of credit card EMI. So, simply put, the total price you pay gets divided into the price paid to the retailer plus interest paid to the financier. But this breakup is usually not shown upfront.

And that's not all.

Even if you are not paying the interest cost which is instead paid by merchant/manufactures, you as a customer would still be required to pay 2 costs, One is the GST mostly levied @18% every month on the interest cost, and keeps getting added to your monthly bill until the tenure gets completed.

The second cost is the applicable processing fees, if any. This cost would also be levied and added to your first credit card bill generated upon making the EMI purchase.

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Beware Of The Rise In Your ¡®Minimum Due¡¯

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Although it's never advisable to pay just your minimum due amount of credit card bill, the uncertainty surrounding life and the financial ups and downs of life may sometimes put you in a spot where you are unable to timely pay the full amount due.

In such scenarios, it's better to at least look at the minimum due and repay that, if not more, as failure to repay even the minimum dues results in harming your credit score, attracts late payment penalty and of course the hefty finance charges of easily around 40% p.a.!

And what comes to your mind when you think of minimum dues? Yes it's true that the amount is usually just 5% of your total bill due, but not so in case you are paying credit card EMIs as well.

Basically, when you avail the EMI facility of credit cards, whether it's the no-cost EMI, the ¡®with interest¡¯ EMIs, or get your purchases converted into EMI later, that EMI amount gets included in your minimum dues, besides the usual 5% amount due on the total bill. Hence, your minimum due amount gets spiked up, which can hurt your pocket further during financial downturns.

Let's further simplify this for you through an example.

For instance, your credit card bill for a month is Rs 25,000, including Rs 5,000 for a credit card EMI. So, in this case, instead of your minimum due amount being around Rs 1,250 (5% of 25,000), it will rather be around Rs 5,000 (EMI amount) plus 5% of (25,000-5,000=20,000), i.e ?1,000, hence totalling to a minimum due of around ?5,000 + ? 1,000=?6,000.

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The Other ¡®Additional¡± Costs: Processing Fees and GST

Also remember that the cost of GST incurred on the interest component of the ¡®no¡¯ cost EMIs has to be borne by you, the customer. It gets added to your credit card bill itself.

And that's not all. Some credit card issuers also charge processing fees for this ¡®no cost¡¯ EMI facility, which again is added to your credit card bill and forms a part of the calculation when the minimum due is calculated as well.

Also Read: Simplifying How Credit Bureaus Calculate Your Credit Score

Should You Opt For No Cost EMIs?

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Certainly, by now you must have got a fair idea behind the various costs attached to the ¡®no cost¡¯ EMI schemes. From foregoing the otherwise applicable discount on lump sum purchase, if available, to incurring the GST and processing fees (if any), take note of all these aspects whenever you think of jumping onto the no cost EMI offer next time. Only those who understand and realize the ¡®actual¡¯ cost of such schemes would be able to either stay away from these schemes or at least know where they are stepping into upon availing such EMI schemes.

Summing it up, it's the fact that these schemes are just a marketing gimmick camouflaging the multiple costs that most of us fail to decode, and hence, hop onto the ¡®no cost¡¯ EMI bandwagon happily, thinking that we get to pay easy EMIs without incurring any additional cost.

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