What is ‘no-cost EMI’ actually costing you?

Riken Mehta
Wednesday, 25 July 2018

Before you fall for its allure, check your requirements and a few other factors related to the No Cost EMI offer

The latest trend in the world of retail — online as well as offline — is the no-cost EMI. You’d have to be living under a rock to not have been bombarded with advertisements screaming ‘no-cost EMI’. 

A no-cost EMI is an offer extended by credit card companies and a few non-banking finance companies to buy expensive products without paying any additional processing fee, down payment, or any other kind of additional payment. 

In today’s column, let’s try and evaluate if the no-cost EMI works in your favour or if it is yet another way of companies fleecing you by charging you hidden costs.

The no-cost EMI is actually the zero-interest loan scheme in a different avatar as the RBI banned the latter in 2013. The central bank believed the zero-interest loan impaired transparency in pricing mechanism and prevented consumers from taking informed decisions.

SO HOW DOES NO-COST EMI WORK?
When you buy any big-ticket product, say the latest iPhone or LCD TV available in the market, on EMI, you are charged a processing fee which ranges from 0.5 per cent to 3 per cent. The interest rate on this EMI is usually between 8 per cent and 15 per cent. 

Let’s say you buy the latest iPhone for Rs 80,000 and avail a standard EMI option of 12 months. The rate of interest  is 12 per cent per annum and processing fee is 2 per cent. So, each month, you will have to pay Rs 7108 for 12 months other than the processing fee of Rs 1,600. Hence, the total amount you will be charged is Rs 86,896.

Now if you opted for a no-cost EMI, then you do not have to pay any processing fee or interest cost on the product you purchase. By that logic, for the same product you bought, you’d have to shell out Rs 6,667 monthly for 12 months. The interest and processing fees charged to you will be zero. This is what makes a no-cost EMI option lucrative. You get to buy the latest, and costly-by-all-means, smartphone without burning a hole in your pocket or having to pay up the lump sum amount in one go. 

More and more consumers are now favouring the no-cost EMI option as disposable incomes rise and aspirations sky rocket. But there are a few aspects you must keep in mind before you take out and swipe your credit card. 

DO YOU REALLY WANT IT?
The no-cost EMI option is a brilliant marketing gimmick, making consumers think why they shouldn’t opt for the latest gadget or consumer durable item on cheaper EMI. The answer to that question, more often than not, is that you don’t need it. 

Companies, etailers and brick and mortar stores are creating a desire within you at a time when the want didn’t even exist. Maybe you don’t need the latest iPhone, maybe your television is working just fine. But by throwing the ‘no-cost EMI’ phrase in your face, over and over again, brands are ensuring you upgrade when you were just fine with what you had. 

ONLY ON SELECTIVE PRODUCTS
Ever wondered why a vegetable vendor gives you one bundle of methi for half its price in the evening? The reason is that methi is perishable and hence, it’s better that he makes a sale, even at half the price, than just throwing it away in garbage. 

Though that’s not exactly the case in electronics and other items, fact is the speed at which technology is developing, every product gets obsolete in just a matter of a few seconds. 

FOR-PROFIT BUSINESS
If you thought that retail companies are the good guy in your spending story, fact is, they are not. Companies backed by large MNCs are profit driven and they will never make any move at the cost of their bottom-line or profits. 

By tying up with various companies and banks, retailers get significant discounts that will never be disclosed to consumers. Also when you will swipe your card for payment, bank will charge a transaction fee of 1 to 2 per cent in no-cost EMI loan schemes. Through ‘no-cost EMI’ schemes, companies make money by driving up volumes either in popular products (such as the iPhone or One Plus smartphones) or in products that will soon be outdated. 

So, go shopping in the mall or online armed with this information and purchase only what you really want!

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