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You want to buy a TV to match your recently renovated hall. You compare models and prices at a few outlets and online. It’s 50,000/- You can’t afford to pay the entire amount upfront. No problem, there is a No-Cost EMI option. But is the EMI really interest free?

What is a “No-Cost EMI” scheme?

“No-cost EMI schemes are loan offers in which buyer of the product or service just repays the selling price of the product in equal installments, without paying any interest on the loan.

So, under no-cost EMI scheme, the total amount paid by you to the EMI provider will be the price of the product split equally across the EMI tenure. The interest payable to the bank will be offered as an upfront discount during checkout, effectively giving you the benefit of No Cost EMI. You might think this as a best deal while buying it but let’s understand math behind it before you opt.

For instance, you decide to buy your favourite product worth Rs 60,000 on one of the e-commerce websites. Assume, they are offering no-cost EMI scheme for six  months. Let’s analyse what actually happens:

Price of the product Less: No Cost Emi discount Amount which will be converted into EMI Add: Interest charged by your bank Final amount you pay
60,000 2,375 57,615 2,375 60,000
Monthly EMI Interest (Rs) Principal Installment Amount
1st Month 672 9,328 10,000
2nd Month 563 9,437 10,000
3rd Month 453 9,547 10,000
4th Month 341 9,659 10,000
5th Month 229 9,771 10,000
6th Month 115 9,885 10,000
Total 2,373 57,627 60,000

You will be charged interest of 2,373 by the bank and as a No cost EMI offer, this interest of 2,375 has already been reduced from the price of your order.

So, when you take the no-cost EMI option as shown in the chart, you pay Rs 2,373 as interest which could have been a discount on cash purchase. Bottom line is you end up paying more in this scheme which includes interest and taxes charged by your bank.

You might just walk away saying Rs.60,000 is too much. I’ll come back later and buy. So no one makes money. But if you only have to pay Rs. 10,000 a month, you are like, I can afford that.

EMI versus SIP (Delayed Gratification)

In an EMI you pay interest and in an SIP you earn interest. It is as simple as that but simple isn’t easy. If you plan that holiday earlier, you will start saving for it and earn an interest on your savings by investing in an SIP in a liquid or even an ultra short fund for your short-term goals. You also get the time to do enough research, decide on the best time to visit the place, and get a good deal on tickets,

Say you are planning a holiday which will cost Rs. 1.5 lakh, if you postpone your decision by a few months and save through an SIP instead, you will have to pay much less…

Cost of Holiday: 1.5 Lakhs

Compare your outgo on SIPs and EMIs (see table), and you will notice how your savings keep increasing over time when you invest in SIPs and how you end up paying more and more when you extend the duration of your EMI. If you invest in an SIP for 12 months you shell out ₹ 1,44,600 but if you opt for an EMI for the same period, you spend ₹ 1,60,771, excluding additional charges. 

Nowadays, the default option to buy the latest smart phone or holiday is by paying through EMI. It is ultra convenient. It literally takes minutes with hardly anything more than standard ID proofs. Even minutes are too long. For example, buyers can instantly convert credit card purchases to EMIs. This is a purchasing trap as many consumers are buying products they don’t really need but feel they are afford with this payment option.

A huge proportion of salary earners see their monthly pay being credited into their accounts and then immediately decimated by automatic EMI withdrawals. The problem is people over borrow and end up paying a huge amount of interest.

The effective interest rates on consumer goods (EMI loans) tend to be very high, around 13-15% currently.

It is very easy to get a loan today. There are personal loans, credit cards and peer-to-peer lending platforms online. People are availing loans at a high interest, many with no idea on how to repay them.

In conclusion, there are times you want to make purchases beyond your budget and is such cases you can avail the No Cost EMI facility. However, when you do that, you must be aware that you are not necessarily on the benefiting end of the deal. If the product is a want instead of a need, incurring debt for it may not be worth it. It is wiser to make such purchases from surpluses already earned.

This Post Has 2 Comments

    1. The Prudent Investor

      Always happy to help!

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