Diwali shopping: Should you opt for the zero-EMI scheme?

This type of EMI is designed to appear "interest-free" to the consumer. It means that you won't be charged interest on the loan

The festive shopping season has begun and last week Indian e-commerce giant Amazon introduced the option for RuPay credit card users to make payments on EMIs. 

With EMI emerging as the most used form of payment during the first 48 hours of the Great Indian Festival Sale, Amazon says 1 in 4 orders were paid for using instalments while 3 in every 4 people who paid using EMI used the No Cost EMI option.

But before you clock on the zero-EMI option, you must note that zero-EMI options sometimes come with hidden charges or processing fees. Although the interest rate might be zero, other costs could raise the effective price of the product or service being purchased. Always read the terms and conditions and make sure you know:

?-? The processing fee amount, if any.

?-? Any pre-closure charges.

?-? Service taxes or other additional costs.

Also read:No cost EMIs galore this festive season: Are there any hidden charges?

Manish Shara, Co-Founder & CEO, ZET, a fintech platform, explains the difference between difference between zero EMI and regular EMI

Zero EMI: In a zero EMI plan, interest is not paid on the borrowed amount, and the EMI amount equals the total product cost divided by the loan tenure in months. However, there may be a one-time processing fee.

Regular EMI: In a standard EMI plan, the EMI amount consists of both the principal and an interest component. The interest is a percentage of the remaining balance, so over time, you pay more than the actual price of the product.

Zero cost EMI operates on the principle of deferred interest. It involves collaboration between the retailer, a financial institution and the customer. 

Shara further cautions buyers about the factors they should consider efore choosing to use this method to make endless purchases during the ongoing sales.

•Total Cost: Calculate the total cost of the product with the EMI plan and see if it's worth it compared to paying upfront.

•Processing Fees: These can sometimes negate the benefit of zero interest.

•Loan Tenure: The longer the loan period, the more likely you will pay additional hidden charges.

•Credit Score Impact: Failing to pay EMIs on time could affect your credit score.

•Opportunity Cost: Consider if the EMI will restrict your ability to spend or invest elsewhere.

Example:

Let's say you want to buy a smartphone worth Rs 20,000 during a festive sale:

Zero EMI: Rs 20,000 spread across 10 months is Rs 2,000 per month. With a processing fee of Rs 500, you pay Rs 20,500 in total.

Regular EMI: Rs 20,000 with an 8% annual interest rate for 10 months might amount to around Rs 2,067 per month, totalling about Rs 20,670.

In this case, the zero EMI seems more attractive, but the processing fee makes the effective cost Rs 20,500, which is still cheaper than the regular EMI. However, the zero EMI option could become less appealing if there were additional hidden charges. Moreover, by opting for the plan, you may end up losing the actual discount that you can avail of otherwise.  If you were to pay upfront, you can ask for that discount portion and pay only the rest.

Also: While you may not be paying the interest on the purchase of a product under a no-cost EMI scheme, banks charge an 18% Goods Services Tax (GST) on the interest, which you are required to pay. According to ClearTax, an individual must compare the implicit interest rate on a no-cost EMI option and the explicit interest rate on an EMI option to make the right choice.

Moreover, since certain sellers may build the interest cost into the product’s actual price, where you basically end  up paying the interest cost despite opting for a no-cost EMI facility, it’s best to compare the prices of the product at multiple platforms and stores.