Scrutinise your no-cost EMI offers for hidden charges, say experts

It’s the festival season and many online and offline retailers are advertising their no-cost or zero-cost EMI (equated monthly instalment) schemes on gadgets and appliances. No-cost EMIs are essentially interest subvention schemes between merchants and lenders. Before availing one, however, you should scrutinise the offer to ensure it is truly no-cost.

How it works

By availing of a no-cost EMI offer, the customer avoids paying the entire cost of the product upfront. Instead, she pays in instalments while at the same time not paying any additional interest cost.

Adhil Shetty, chief executive officer (CEO), Bankbazaar, says, “The interest cost is not waived in the case of a no-cost EMI. Instead of the customer, the manufacturer and the merchant bear the interest cost.”

In other words, they take a cut on their margins (they hope to recover this cost through higher volumes).

In some cases, however, the customer who avails of a no-cost EMI loses out on some benefits. Shetty says, “You may not get certain discounts which you would have if you had made an upfront payment.”

There could also be a third scenario where the interest cost is added to the product price and then the higher price is converted into EMIs.

Understand the math

Suppose that you buy a laptop worth Rs 1 lakh. The interest cost is 12 per cent and you are offered a 6-month EMI plan. Here the interest cost comes to Rs 6,000.

In the first scenario, the manufacturer and the merchant take a cut on their margins to pay this amount. In the second scenario, the merchant would have given you a discount of Rs 6,000 if you had paid a lump sum. Instead, it pays this amount to the bank (with which it has a tie-up for offering this scheme).

In the third scenario, the interest cost is added to the price (which becomes Rs 1.06 lakh) and the customer is required to pay this higher amount in six instalments (of Rs 17,667 each).

Better than credit card EMIs

Experts say it is okay to go for a no-cost EMI option if you can’t pay the entire cost upfront and need to pay in instalments. Sachin Vasudeva, director & head of credit cards, Paisabazaar, says, “If you wish to make a big-ticket purchase on EMI without having to pay additional charges, no-cost EMI would be the right choice for you.”  

A no-cost EMI scheme is better than converting credit card purchases to EMIs, where the interest cost can go as high as 20-25 per cent (in a few cards the cost could be lower).

Things to watch out for

Some no-cost EMI facilities may be available for short tenures only. This would lead to ballooning of the size of each EMI. Missing out on even one will have consequences. Vasudeva says, “If you fail to pay the EMIs on time, you may have to pay finance charges and other penalties. Your credit score could also be negatively impacted.”

These schemes may be available on goods from only certain manufacturers or sellers, and on only select products, thereby narrowing the choice available to you.

Sometimes, the buyer may be required to make a down payment. Dilshad Billimoria, board member, Association of Registered Investment Advisors (ARIA), says, “Avoid these offers if the seller asks for a down payment and still collects 12 instalments of the price of the product over 12 months. In effect, the down payment becomes the interest payment.”

At times, the customer is required to pay a processing fee, which is again another way of recovering the interest cost.

Opting for too many such schemes can also lead to a debt trap.

What should you do   

Compare the product’s cost across sellers to ensure the interest charge has not been tagged to the price.

Understand all the terms and conditions in advance. Raj Khosla, founder and managing director, MyMoneyMantra, says, “Before selecting a no-cost EMI offer, check the tenure, processing fee, and pre-closure charges. Also, keep an eye on the due date of your first EMI.” 

The two sides of no-cost EMI schemes

Pros

• No-cost EMIs make the purchase of big-ticket items easier on the pocket

• If the interest cost is borne by the manufacturer and the merchant, the deal becomes truly attractive

• Even borrowers with poor credit scores can avail of these schemes

Cons

• Sometimes these schemes can try to extract the interest cost from you in the form of processing charge or down payment

• At times, the interest cost is added to the price and then split into EMIs

• Failure to pay even one EMI will lead to high interest rates, late fee, and credit downgrade; can lead unwary borrowers into a debt trap