No Cost EMI: How does it work? Is there a catch involved?

Last Updated on November 4, 2019 at 2:02 pm

What is No Cost EMI? 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. This is a guest post by Pratik Jain.

To understand this, let’s consider a case study. Chetan is a young bachelor working in an MNC with a handsome salary. He wants to buy a One Plus 7 (6GB) smartphone which costs 29,999 INR. He does not have the full amount to pay upfront, but he can manage to pay off the loan in 6-7 months. He found a deal on an online shopping site where he can pay 5000 INR each month for six months. So effectively he gets a loan without paying any interest on it. Isn’t it a great deal? Let’s find out.

Loan without Interest: This No Cost EMI option seems to be a loan without interest, is it? According to RBI circular from 2013, Banks should refrain from offering any zero-interest loans on retail products.

According to RBI –  “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”.

Since the Zero Interest Loan concept is non-existent now, these schemes run on a different formula. There are two ways in which these schemes are running nowadays. A widespread practice by Online Shopping Portals is a discount offer equivalent to Interest, so the effective price seems to be the same as without Loan to Customer. The second way is they add Interest to the cost of the product, so end-user feels nothing is extra is lost from his pocket.

Forget the second practice for now as it is rare, and there is no easy way to identify if any retailer is doing that. In the first way where the retailer offers discount equivalent to Interest, It seems like a good deal in first look, but there is a reason retailers 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.

Also 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!

Now let’s come back to our case study to understand this with a real example here. Chetan is buying Phone at 29,999. With six months EMI of Rs. 5,000 each month. Generally, such loans have more than 15% and up to 30% Interest rates! If we assume approximately 18% Interest rate, The break down of the deal will look something like this.

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 youngsters like Chetan hate to do), you might find a deal worth 10% off + Additional Cashbacks. Which means Chetan could have got the phone for 27,000. 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 (Which is quite rare nowadays), remember you are buying things on loan at more than 15% Interest. If it is worth that product? That’s a matter of choice Individuals should make.

The real problem is when Interest is added to the Price, and then it is offered on No Cost EMI. In this case, there are fewer options available by which customer can find the actual price of the product. One way to spot this is by checking the cost of the product on all Online Platforms, but this does not help always. But 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. Which only recognises in retrospect.

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