Go for zero-cost EMI, but don't break investments giving good returns

Cost-benefit analysis needs to be done before choosing an option; calculate hidden interest components

Among the people working from their homes because of the Coronavirus pandemic, there is a marked tendency to go online and shop. Says Amber Ram, a Mumbai-based private sector employee: “I do sometimes tend to shop online just to ward off boredom.” Shopping festivals like the Flipkart.com Big Shopping Day sale from March 19-22 add to the allure of online shopping. Even if you belong to the judicious bunch who genuinely needs to buy a big-ticket item, there are quite a few ways you can pay. You could go for the no-cost EMI option, break an investment, take a personal loan, or save for a few months and then buy. How should you go about making a choice?

How does a no-cost EMI work? If the price of a laptop is Rs 1 lakh, you get to pay instalments of Rs 10,000 for the next ten months. No interest cost is charged from you. Says Gaurav Aggarwal, director and head of unsecured loans, Paisabazaar.com: “Under the zero-cost EMI offer, the buyer repays the selling price in equal instalments over the tenure. The seller receives the discounted price while the bank receives the balance amount—the discount—as its interest. The only additional cost borne by the buyer is the GST levied on the interest component.” In short, the discount that you would have enjoyed if you had paid lump sum goes to the bank as interest payment.

Other loan options also exist. Says Adhil Shetty, CEO, BankBazaar: “Traditionally, credit cards have enabled users to opt for purchasing products on EMIs at no extra cost or documentation through an EMI on-call or EMI options offered by specific merchants. Today, you have the option of an EMI card as well. The EMI card is a pre-approved loan where the EMI starts only after you have used the card to buy a product.”

Source: MB Wealth Solutions

Should one break an existing fixed deposit or units of mutual funds? Says certified financial planner Nirreen Mamaji: “Redeeming an investment could be a bad strategy since the mutual fund units may have been purchased at lower NAVs. By not staying invested you might lose out on further gains.” Long-term returns from equity mutual funds can be above 10 per cent. Similarly, breaking an FD that pays 8 per cent to get a discount worth 5 per cent may not be worthwhile. On the other hand, if you withdraw money from a savings account, which pays 3 per cent, to earn a lumpsum discount of 5 per cent, that could be a good decision.

In some cases, it makes sense to go for a no-cost EMI if that means you don’t have to break an investment, even if you have to forgo the small discount available on lumpsum payment. Thus, a cost-benefit analysis needs to be done before choosing an option.

Experts have two suggestions regarding taking a loan to make a purchase. One, when you take a loan, there are always costs attached, though they may be hidden. Says Bengaluru-based financial expert Mrin Agrawal: “It is always better to save and buy a product instead of taking a loan. There is always an interest component in a loan though it maybe camouflaged.” And two, experts are currently advising against all forms of debt. Says M. Barve, a Mumbai-based financial advisor: “In a time like this, when the markets are tanking, the economy is slowing down and jobs are at risk, taking on additional debt should be avoided.”