Funding holidays through EMIs is too expensive

Except for emergencies or buying a house/car, don't take the EMI route to fund unimportant expenses

Rajeev Agrawal, chief executive officer of Innoviti Embedded Solutions, a payment gateway, says repaying credit card bills via equated monthly instalments (EMIs) is fast becoming popular with consumers, for being hassle-free, low-cost and less time consuming. He believes this option might see further growth.

Repaying a credit card bill can be done in two ways. One, when a card issuer allows repayment by EMI on specific purchases of a certain amount from select stores, like consumer durables and furniture. This option is typically available at the time of making purchases. Or, card companies can offer this facility on the dues.

Bankers agree with Agrawal. Many times banks don't need to approach customers to convert credit card bills to EMIs, says an HDFC Bank official. On an average, banks claim to have seen a five to 10 per cent jump in credit card users moving to the EMI route.

The advantage of repaying credit card bills via EMI is that the applicable rate of interest (0.9 to 1.99 per cent a month) is lower than the one applicable on carrying forward card bills (18 to 40 per cent a year). This option is also cheaper than a personal loan (15-30 per cent a year). And, in the case of a purchase-specific option, you can negotiate for an interest-free EMI as well. However, you will be charged a one-time processing fee, which can be in the range of Rs 149-250 per EMI transaction or 1.50 to two per cent of the loan amount. Sometimes it could be capped between Rs 750 and Rs 1,750. This becomes convenient for those who don't want to go through documentation for a balance transfer or for taking another loan.

Interestingly, the purchase-specific EMI option is getting extended to areas like paying education fees, healthcare and holidays, says Agrawal. However, financial planners do not favour this.

The disadvantage of the EMI facility - the interest zooms to anywhere between 20 and 35 per cent if you fail to pay your dues in a month. This interest will be over and above the EMI amount, which already carries the basic interest. In the repayment period, the entire card limit cannot be used, except for the remaining limit, if any.

This route for repayment is best for those who habitually carry forward a part of the card bill every month. "Or, even someone who is very well planned and a good negotiator, that is, able to get his interest waived completely, can use this to his advantage. Invest in liquid funds and slowly pay off the principal," says certified financial planner Malhar Majumder.

However, EMI is not a recommended option for all. While swiping the credit card for healthcare needs can be considered due to unforeseen circumstances, it is better to plan education and holiday needs well in advance. Therefore, the need for discipline in all kinds of spending through credit cards is essential.

Says certified financial planner Suresh Sadagopan, "Taking credit to holiday is not advisable. Education and travel can be planned. Typically, someone with five years or more in hand can invest in equities to meet the goal. If the horizon is two to four years, opt for a combination of debt and equity products. The option is to divert any kind of surplus / bonus or other investments."