No-cost EMIs are among several novel and hugely popular offers that e-commerce retailers offer during the festive season to up their sales. Let’s take a look at what this really entails.
The festive season is around the corner. Not that you needed to be reminded of that given the barrage of SMSes, emails and ads you’ve been bombarded with on your phone and TV. Online retailers and e-commerce giants look to this time of the year to make up for slow growth over the rest of the year by racking up huge sales.
This can be evidenced from the jaw-dropping offers they run for customers on financial products like Credit Cards and Personal Loans to help them fund purchases on their platforms. One of the most unbelievable yet hugely popular marketing gimmicks that online and offline retailers employ is the ‘No-cost EMI’ or ‘Zero-cost EMI’ on mobile phones, electronic appliances etc. Before you fall for this marketing gimmick, let’s take a look at what this really entails.
For many, the festive season can mean getting rid of old junk and sprucing up the house with newly purchased goods like a refrigerator, TV, washing machine and even gifting yourself or your dear ones a brand new smartphone. These, however, come at a steep price. And for many, paying the entire cost upfront can seem pretty daunting.
Opting for an EMI scheme to buy any of these can seem attractive to many, and does, in fact, ease the burden of paying the huge cost in one go. Zero-cost EMIs may seem like an even more attractive proposition – one that ostensibly lets you pay for only the cost of the product minus the interest. However, zero-cost EMIs are much more than what meets the eye. Let’s find out how.
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Understanding no-cost EMI
According to experts, loans sold as ‘zero-cost loans’ in reality have pretty high interest rates ranging from 15% to 24%. Online e-commerce and offline retailers tie up with several financial institutions to offer these loans but they come with a caveat of hidden charges.
An RBI circular dated September 17, 2013, nullifies the concept of zero percent interest – “In zero percent EMI schemes offered on Credit Card outstandings, the interest element is often camouflaged and passed on to the customer in the form of a processing fee. Similarly, some banks were loading the expenses incurred in sourcing the loan (viz DSA commission) in the applicable rate of interest (RoI) charged on the product. Since the very concept of zero percent interest is non-existent and fair practice demands that the processing charge and RoI charged should be kept uniform product/segment wise, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting vulnerable customers. The only factor that can justify differential RoI for the same product, tenor being the same, is the risk rating of the customer, which may not be applicable in case of retail products where the RoI is generally kept flat and is indifferent to the customer risk profile”.
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How do these schemes work?
The bank charges you interest. But this interest amount will be given to you as an upfront discount at the time of order, thus making it ‘effective no cost of interest’ for you. You will have to pay the bank the total cost of the product split into instalments.
Monthly instalments = Total product price/EMI tenure in months
Let’s take an example:
| Cost of mobile phone | Rs. 30,000 |
| No-cost EMI discount offered | Rs. 638 |
| Bank interest charged every month on card | Rs. 638 |
| Finally you pay | Rs. 30,000 |
In this example, the full amount charged by the bank on your card= Rs. 29,632. After 4-7 days, the bank will reverse this amount and convert it into EMIs. Let’s take a look at the break-up of your EMI to understand this better:
| Monthly instalment | Interest | Principal |
| 1st EMI Rs. 10,000 | Rs. 318 | Rs. 9,682 |
| 2nd EMI Rs. 10,000 | Rs. 213 | Rs. 9,787 |
| 3rd EMI Rs. 10,000 | Rs. 107 | Rs. 9,893 |
| Total= Rs. 30,000 | Rs. 638 | Rs. 29, 362 |
| Finally you pay = Rs. 30,000 | ||
An important thing to note here is that if you pay the retailer the full price of the phone upfront, you may be able to get the phone at a discounted price of Rs. 29,632.
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As evident from above, the concept of no-cost EMI is pretty dubious and there’s much more than what meets the eye. If you’re considering buying a gadget or electronic appliance by availing this option, comb through the terms and conditions carefully to understand the caveats better. The cost or interest of the loans under this scheme is built into the loan and the EMI breakup may not make that immediately clear.
Purchase of big-ticket items can get more pocket-friendly if you plan your finances well by making financial investments in the right Fixed Deposits and Mutual Funds. Not sure where to start? Tell us your goals and we’ll hook you up with the right investment.