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

How does No Cost EMI work? Is there a catch involved? What is the cost? Is it worth going for? Let us find out with an example.

No Cost EMI How does it work Is there a catch

Published: November 4, 2019 at 1:16 pm

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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.

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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.

Original price29,999
Discount Offered-1500
Interest on Loan1500
Amount to be paid29,999

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 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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10 Comments

  1. Not sure I understand the article. If an item is available for ₹30000 upfront payment, what is the matter in availing a no cost emi option of paying ₹5000 for 6 months?

    Retailers are offering no cost EMI options in order to make it easier for customers to make purchases and thereby increase sales. It is just a payment scheme. I have never come across a no cost emi scheme (at least on Amazon or Flipkart) that has the deceptive model described in the post.

    I recently purchased an item that i could easily afford up-front. It was on discount. It was also available, INCLUDING the discount, on no cost emi

    1. You’re getting the discount only if you choose No Cost EMI. Those who are ready to pay should have get the product at ₹28500 if 1500 was real discount. So it’s loss for them.

  2. You forgot to mention the GST @18% interest on 1500 is charged to chetan and that comes to 270 extra to Chetan out of pocket.this is one of the hidden charges borne by the customer.

  3. You forgot to add GST on each emi interest which need to pay by buyer.

    I brought the Product from Amazon and get the upfront discount equal to emi interest but GST 18% was not included. I got to Know this hidden change after my credit card statement.

  4. Sorry but you are not making any sense… It’s all perceptions based but not on realistic figures. The one problem which you take small loans such as No cost EMI or Bajaj Finserve zero percent loans… On a long run you end up loosing your CIBIL ratings.. As banks such as SBI takes it as if you are not able to buy such small cost articles such as mobiles in 30 K or any other product in similar range from Bajaj Finserve.. How will you take Bigger loans such as Home loan or car loan… This is a matter of concern.. So rest depends on our own understanding and perception.. Thank you

  5. I too not understanding about this blog claiming of upfront payment is less when it is clearly stated the cost of the product is X irrespective paying upfront or no cost EMI. I agree on the GST.
    Also, if a person is working in MNC with that young age, will have more opportunities to earn more and spend more to improve the quality of life. I think we should come of out 80’s mentality of loan is bad for people as long as people take the calculated risk.

  6. Pratik, I have always been wondering about ” What is the catch in no cost EMIs ?” Not sure if I still understand this.

    Last year I was looking to purchase a Refrigerator & was willing to pay upfront to get maximum discounts. However to my surprise, I was given an offer of 6000 Cashback on HDFC card if I went for No Cost EMI option. This cashback offer was not available, if I paid the entire amount upfront. I ended up going for the No Cost EMI option & saving 6000 bucks. The amount which I was willing to pay upfront was not paid in 11 months & got a cashback of 6000 three months down the line.

    I believe I got the best deal. Thoughts / Comments??

    1. The same thing happened with me.
      But I noticed that, gst @ 18% was paid extra.

      So for me actual cash back was 1500- 280 gst == ~1200. But I was still in profit. and I did extensive research before buying in no cost emi offer (it wad first time for me).

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