There is a God that resides in every human, but when it comes to a businessman, the god only resides in his ‘Galla’ or tijori and that is the only god whose language he or she understands.
Whenever I used to visit any retail mobile shop or buy a mobile phone from amazon, I used to get shocked with this facility of Zero Cost EMI and often used to wonder, why would someone be so generous? The whole financial system has got built on the basic premises of vested interest and incentives and here we see one ‘God’s own child’ offering Zero Cost EMI.
But is it really that true that someone is giving you something without charging anything in return? Well, ABSOLUTELY not!!
The e-commerce websites like Flipkart and Amazon India offer no cost EMI schemes with interest applicable, which is usually somewhere arounds 15 percent. These sites charge discount which is equal to the interest rate. Assume a customer wants to buy a smartphone worth Rs 30,000.
In case the customer chooses a three-month no cost EMI plan where the interest charged is 15 percent, they will have to pay Rs 4,500 as the interest amount. Now, in case the customer chooses to pay the whole amount up front, they will be able to purchase the device for Rs 25,500. But should they choose to pay through no cost EMI, they have to pay the full price i.e. Rs 30,000. In this case, the interest amount is paid to the financier bank and the rest of the amount to the retailer.
On products that are not shown as discounted, the interest amount is added to the price. In the above case, the Rs 30,000 smartphone brought through a 3-month no cost EMI offer will actually cost you 34,500, to be payable over three months. However, this method is not used anymore since RBI released a circular in 2013 banning no cost EMIs. According to the circular, banks can’t offer any no-cost EMI because “the interest element is often camouflaged and passed on to the customer in the form of processing fee
The e-commerce websites these days discount the product to the exact amount of interest, which brings the amount payable to the actual price of the product. And since no extra charge is levied over and above product price, it’s called no cost EMI.
Advantages of no cost EMI
There’s a reason why online merchants are offering no cost EMI in tie-ups with major banks in the country. Below are the advantages of no cost EMI
- Ability to buy expensive utilities without having to pay upfront
- Pay conveniently over few months
- Flexibility to choose the tenure according to your budget every month
- The ability to pay the same amount in installments helps in better budget planning
Disadvantages of no cost EMI
While the no cost EMI certainly is convenient and allows purchasing something that you need but can’t because of financial restrictions, it does come with its set of drawbacks. Let’s take a look.
- Cost of paying EMIs is higher than paying upfront
- You might have to pay a fixed non-refundable processing fee for the EMI
- You will have to GST on interest payable
- In case you return the product and get a refund, you will still end up losing money on interest
- You may end up buying expensive utilities that you want but don’t need
Should you choose no cost EMI?
In case you are absolutely sure that you need the product you plan to buy through no cost EMI and will be able to pay EMI every month for the tenure, than yes, no cost EMI is a very convenient method to make the purchase. However, if you are not sure of the purchase and were considering it on an impulse, it makes no sense to pay more than what you could have in the first place.
