When its festival time and you notice almost every other shop offering discounts and offers, you are tempted to go on a shopping spree and buy even things you may not need. But what happens to your liquidity at such times and how do you settle your credit card bills after the shopping? Merchant outlets and credit card companies recognize that this could be a concern to many shoppers and offer a scheme of payment by Equated Monthly Installment (EMI) in order to tap such customers as well and increase their sales. This is very popular in India for electronic appliances, mobiles, laptops and other gadgets. An EMI scheme means you can purchase the product and begin using it immediately, but pay the price over an extended period of time in installments. On the face of it, this scheme looks very attractive and easy on your purse. But there is no such thing as a free lunch. Let’s look at the extra costs you are likely to pay when you opt for an EMI scheme and what you should evaluate before you opt for such a scheme.
Costs to be borne while opting for an EMI Scheme:
Higher amount paid: Raj opted to purchase his mobile phone worth Rs. 40,000 through an EMI scheme offered by the retailer, which was in tie-up with his credit card company. The EMI was for 6 months, which should have technically worked out to a down payment of Rs. 4000 and 6 EMIs of Rs. 6000 each. But Raj discovered that he had to pay a down payment of Rs. 4000 and 6 EMIs of Rs. 6833 each. That is, he would have ended up paying Rs. 5000 more on the product if he had opted for the EMI scheme. This is because most EMI schemes come with a hidden cost, which is the interest you will have to pay.
Additional costs: Apart from the interest cost, most credit card companies charge a processing fee when you opt for an EMI scheme. This is a percentage on the transaction amount and varies from bank to bank.
Default in paying EMIs: The EMI amount will get reflected on your monthly credit card bills along with your other dues. So when you fail to make the payment of your credit card dues in a month, you will be charged the normal interest of anywhere between 24%-36% for non-payment along with the late payment fee and taxes. The EMI amount, in addition to being subject to these charges will also carry the basic interest cost thus causing a double whammy.
Absence of discounts: Often banks tie up with merchant outlets and offer the EMI option on various products. However, most products carrying the EMI option do not have the benefits of a discount or any offers attached to them. For example, an LCD costing Rs. 30,000 under the EMI option may be available at Rs.27,000 without the EMI option.
Pre-closure penalties: If you purchase a product on an EMI scheme offered by your credit card company, it is most likely that there will be a pre-closure penalty. This means that if you have the cash to pay off the entire amount before the completion of the total number of EMIs, you will have to pay a pre-closure charge, which is usually in the range of 2.5%-3% of the outstanding principal amount.
Things to evaluate before opting for an EMI Scheme:
As you can see, even though an EMI option may be light on your pocket, there are several costs attached to it. You must therefore evaluate the offer on the table before you opt for it. As a first step, remember to read the fine print thoroughly, as card companies can change terms at their discretion. You must also check if the total payment you are making, including all the EMIs and the down payment is equal to the MRP of the product or if it is more than the quoted price. If it is more, then it means you are being charged interest and/or processing fees for the option.
You must then check all options for the product in other stores – both online and offline, and see if you can get the product at a better price if you do not opt for EMI. If the difference is substantial, it is better to opt out of EMI.
Remember to consider the likely costs like pre-closure penalty when you evaluate the EMI option, as there are a few credit cards which offer zero pre-closure charges. This is because you should have the flexibility to close the scheme when you have excess cash. Also remember to consider how the existing credit limit on your card will change because of opting for the EMI scheme. When you use EMI on credit cards, your existing credit limit comes down to the extent of the outstanding amount.
Is an EMI scheme good or bad?
Although a good EMI scheme is easy on your wallet, you must try to avoid it as the first option. You may not only be spending more than the actual worth of the product, but also splurging first and then relying on EMI payments is not healthy for your finances. Remember to evaluate all costs associated with the scheme and then choose or reject it.