NO COST EMI; Is it Beneficial?

EMI stands for Equated Monthly Installments. It is a fixed amount lender pays to the borrower each month until the principal and interest are fully paid. No Cost EMI is where the consumer “thinks” there is no extra cost other than the price of the product.

Loan without Interest:

According to RBI circular from 2013, Banks should refrain from offering any zero-interest loans on retail products.

“some banks were loading the expenses incurred in sourcing the loan (viz DSA commission) in the applicable RoI charged on the product. Since the very concept of zero per cent interest is non-existent and fair practice demands that the processing charge and RoI charged should be kept uniform product / segment-wise, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting the vulnerable customers. The only factor that can justify differential RoI for the same product, tenor being the same, is the risk rating of the customer, which may not be applicable in the case of retail products where the RoI is generally kept flat and is indifferent to the customer risk profile”.

Now-a-days, Online Shopping Portals offers a discount equivalent to Interest, so the effective price seems to be the same as without Loan to Customer.

Here, the retailer offers discount equivalent to Interest, It seems like a good deal in first look, but there is a reason retailer’s offer this.

One reason is where you lose money since you have to let go of the discount which would have been yours (If you pay upfront amount). That discount is higher than the interest which retailers have to pay to Banks. In the second case, the Company might not want to devalue the product as it will affect the brand value.  So instead of offering a direct discount, they offer No Cost EMI to increase sales.

No Cost EMI is usually offered on the credit card associated with the bank making the offer. This way, they are betting on consumers paying credit card interest too!

Let’s understand it with a example. Kiran is a Professional Outdoor Photographer. He wants to buy OnePlus 7T Pro Smartphone worth 53999 INR. He doesn’t have to pay the upfront amount, but can manage to pay off in 6-7 months. He found a deal on ecommerce portal where he can pay 9000 INR for 6 months. He is delighted to purchase the product without opting for EMI. Isn’t it a great deal? Let’s find out.

Such loans carry 18% to 30% interest. Let’s assume for the case study, it’s 18%. Here’s the break-up:

  • Original Price 53,999
  • Discount Offered -1990
  • Interest on Loan 1990
  • Amount to be paid 53,999

The problem with such deals is, online sites never provide such breakdown upfront; otherwise very few people will fall for it. If you randomly search any site at any time there are 5% off offers available. But if you wait a couple of months (Which most people like Kiran hate to do), you can find a deal worth 10% off + Additional Cashbacks which means Kiran could have got the phone for 51,000. You can take any product at any time and do this math you will find out paying money upfront is a better option.

Even if there is no other discount available, remember you are buying things on loan at more than 15% Interest.

That’s a matter of choice; people should make.

The real problem is when Interest is added to the Price, and then it is offered on No Cost EMI. Any company paying Interest from their pocket to increase sales is a bit difficult for me to digest.

Summary: Even though many examples prove that No Cost EMI is harmful, there is an even bigger risk present when you opt for such plans. If you often have this habit of buying things on EMI, you are essentially spending before you earn. If you do not pay attention to this habit, it will not take long to turn into spending more than you earn.

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