Think Twice Before Your Next Purchase: The Dark Side of No-Cost EMIs

No-Cost EMI: This offer is visible everywhere nowadays, whether on online shopping platforms or in large retail stores. The convenience of ‘zero-cost installments’ attracts us when buying expensive mobiles, laptops, or home appliances. But is this offer truly cost-free? Let’s delve deeper to uncover the real truth.

No-Cost EMI: A Simple Example

Let’s say Sumon wants to buy a new smartphone priced at ₹50,000. He sees that by choosing the no-cost EMI option, he gets an attractive discount of ₹4,000. This means he has to pay a total of ₹46,000 in 6 monthly installments. At first glance, this seems like an excellent deal.

But he was surprised when he checked his credit card statement. The reality is, the bank records this ₹46,000 transaction as a loan with interest. Within this amount, about ₹4,000 is shown as interest and the remaining ₹42,000 as the principal. And this is where the extra costs are hidden.

What Are the Hidden Costs?

The biggest trap of a no-cost EMI is its hidden charges, which usually remain out of sight.

• GST on Interest: According to Indian regulations, an 18% GST (Goods and Services Tax) is levied on the interest component of loans taken via credit card. In Sumon’s case, an 18% GST, amounting to ₹720, was charged on the ₹4,000 interest shown by the bank.
• Processing Fee: Almost all banks charge a one-time processing fee for EMI conversion. This fee usually starts from ₹199 and can vary for different banks. GST is also added to this fee.

After adding these two costs, Sumon’s ₹4,000 discount was effectively reduced to less than ₹3,000. In other words, he had to pay nearly ₹1,000 extra for something that was advertised as ‘no-cost’.

The Lure and Risk of Long-Term EMIs

It’s often noticed that the longer the EMI tenure, the bigger the discount offered. This is because, with longer-term loans, the risk of the customer defaulting or missing a payment increases. As soon as a payment is missed, banks start levying heavy penalties and interest (up to 36% to 48% annually), which is highly profitable for them. This severely damages the customer’s credit score.

How to Stay Cautious?

This doesn’t mean that no-cost EMIs are always bad. It can be a good option if you make an informed decision.

• Compare: Before buying, always compare the no-cost EMI offer with the upfront payment offer. Sometimes, you can get a better discount on a one-time payment.
• Calculate: Before making a final decision, calculate your total outflow by adding the potential GST and processing fees.
• Read the Terms: Visit the bank’s website to understand the foreclosure charges (charges for closing the loan before its tenure) and other terms and conditions.

In conclusion, it’s crucial to be aware before making any financial decision. It is wise to understand all the calculations behind the ‘No-Cost EMI’ tag instead of just being attracted by the term itself.