No Cost EMIs are a common option for many people in India while making expensive purchases.
They make it easy to pay for these products over time without having to make a sizeable upfront payment, whether you're wanting to buy a new smartphone, refrigerator, or even a television.
However, it's crucial to understand how these schemes work to make the best of them.
How It Works ⚙
Imagine you're at the store, and you find the perfect phone of your dreams. It's shiny, new, and costs a whopping Rs. 1,00,000. But as you're about to pull out your wallet and hand over your hard-earned cash, the salesman whispers to you, "Psst, you know what's even better than buying this phone? Buying it on a No Cost EMI!"
This means you can pay for the phone in monthly instalments without any extra interest tagged on. Just think of it as paying for the phone in bite-size chunks.
What To Know 💁♂️
There ain't no such thing as a free lunch. If you are using a No Cost EMI, you should be aware of the below information to get a good deal.
Processing Fees Some retailers or lenders may charge a processing fee for availing a No Cost EMI option. This fee may be a percentage of the total purchase value or a fixed amount.
For example, if you are buying a phone on No Cost EMI and the lender is charging 3% as processing fee, then you'll end up paying 3% more than the actual price of the phone. So, before opting for No Cost EMI, make sure you take the processing fee into account.
Opportunity Cost Another potential hidden cost of No Cost EMI is that retailers or sellers may not offer discounts or promotions on products that are purchased using No Cost EMI. You end up paying full price for a discounted product in such a scenario.
This happens as the seller is paying the interest on your behalf in the form of a merchant discount rate (MDR). This means that you are paying a higher price for the luxury of a "No-Cost EMI" product.
A Good Deal If a merchant wants to incentivise you to buy their products. They way will pay the interest for your EMI purchases, your bank will continue to charge you interest on the order value.
This means under a No Cost EMI offer, the total interest amount payable by you, is adjusted from the price of your order. So if the bank is charging you Rs. 5,000 in interest, your product price will be discounted by Rs. 5,000 by the merchant so you end up paying the same price despite the bank interest.
This is the best-case scenario for a No Cost EMI purchase, because it's like getting a discount without even trying!
How Do I Get One 👨🦯
Credit Card This utilises your existing credit limit to give you the EMI facility.
For example, Vishal upgraded his rusty old laptop with the newest model, worth Rs. 1.2 lakh. He used his credit card, which had a limit of Rs. 3 lakh, to avail a No Cost EMI while making the purchase. And just like that, his credit limit went down to Rs. 1.8 lakh.
His EMI plan will make him pay Rs. 10,000 every month. Every month, his credit limit is released by the same amount. By the end of the year, he'll be back to his full credit limit, ready to make more impulsive purchases!
Debit Card All that is needed is a bank account with a bank that offers EMI on debit cards . You need to check your eligibility with the bank before availing this facility. Availing an EMI on your debit card is as easy as online shopping.
For example, Nikhil wanted to purchase a new camera, worth Rs. 80,000 and he sees a merchant offering a "No Cost EMI" deal on the purchase. He uses his debit card, and the total amount of Rs. 80,000 is deducted from his bank account.
But soon after, the bank credits back the same amount in his account, thus converting the transaction into loan. Now Nikhil can repay the amount in monthly instalments just like any other loan.
Also, it's important to note that, in order to make this payment, your bank may have pre-approved an overdraft capacity for you, which is used for the EMI and not just your deposit.
EMI Card This is being used to describe products like Bajaj Finserv EMI Card; as well as their online counterparts that solely exist to provide EMIs for any purchase.
You need to pay a variety of fees like processing fees, an annual fee, card fees and a high penal interest of up to 3.5%. Beware of all the costs involved before enrolling for such a product to just make one purchase.
Credit Score Impact 🚦
No-cost EMI is a type of instalment credit which if paid timely helps in building a credit score
Making payments on time every month, you can establish a positive credit history, showing lenders and other financial institutions that you are responsible and capable of managing your credit
However, if you use a debit card, it is possible to have too many "Personal Loans" on your card, which could adversely impact your credit score
With an EMI Card, a singular personal/consumer loan of your spending limit will show up on your credit report
Any delay or missing payments will of course attract penal interest as well as severe damage to your credit score.
In Sum ➕
No Cost EMI options can be great for customers who carefully select their purchases and fully understand the terms and conditions before making a decision. This option allows for better management of cash flow and offers access to a line of credit with minimal or no cost.
However, it's important to use the flexibility of repayment wisely, and not just for frivolous expenses, as that can lead to trouble in the long run.