When its festival time and you notice almost every other shop offering discounts and offers, you could be tempted to go on a shopping spree and buy things you may not even need.
But, what happens to your liquidity during times like these and how do you settle your Credit Card bills after all that shopping? Merchant outlets and Credit Card companies recognised that this could be a concern for many shoppers.
So, in order to tap such customers as well as increase their sales, merchants offer a scheme of payment wherein customers can make purchases with their Credit Cards and pay back the amount in Equated Monthly Instalment (EMI).
Additional Reading: Everything You Should Know About Credit Card EMIs
This is very popular concept in India, especially when it comes to buying electronic appliances, mobiles, laptops and other gadgets. An EMI scheme means you can purchase the product and begin using it immediately, while you pay the price over an extended period of time in instalments.
While this scheme looks attractive and easy on your pocket, there’s no such thing as a free lunch.
Additional Reading: Using Credit Card EMI To Buy Things? Know The Benefits
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 payment option.
Costs to be borne while opting for an EMI Scheme
- Higher amount paid: Let’s assume that you were to purchase a mobile phone worth Rs. 40,000 through an EMI scheme offered by the retailer, who has a tie-up with your Credit Card company.
If you choose a repayment tenure of 6 months for example, it technically works out to a down payment of Rs. 4,000 and six monthly instalments of Rs. 6,000 each.
However, in reality, you have to pay a down payment of Rs. 4,000 and six EMIs of Rs. 6,833 each. Which means you will end up paying Rs. 5,000 more on your mobile phone. This is because most EMI schemes come with a hidden cost – the interest that you will have to pay in addition to the actual cost of the product.
Additional Reading: If We Gave You Rs. 1 Lakh, Would You Buy The iPhone X?
- 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.
Be sure to check with both the retailer and your bank about the charges you will have to pay apart from the EMI.
Additional Reading: Credit Cards With Zero Annual Fees In 2017
- Default in paying EMIs:The EMI amount will get reflected on your monthly Credit Card bill along with your other dues. So, if you fail to make your monthly Credit Card payment, you will be charged the normal interest, which could be 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. And, remember, defaulting on your payments will affect your Credit Score directly. A bad Credit Score brings bad news should you need to apply for a loan or a Credit Card in future.
BB Tip: Always stay on top of your payments. They are your financial responsibility and must be treated with utmost priority. You can check your Credit Score for FREE by clicking on this link.
- Absence of discounts: Often banks tie up with merchant outlets and offer EMI options 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 TV costing Rs. 35,000 under the EMI option may be available at Rs. 33,000 without the EMI option. By choosing the EMI option you may miss out on the original discounts on various products.
- 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.
Additional Reading: Credit Card Handbook: All Questions Answered
Things to evaluate before opting for an EMI Scheme
As you may have already figured, 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.
- 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 the EMI option.
- Remember to consider the likely costs, like pre-closure penalty, when you evaluate the EMI option, since 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.
Additional Reading: How Not To Fall In A Debt Trap While Doing Online Shopping
Is an EMI scheme good or bad?
Although a good EMI scheme may seem easy on your wallet, you could end up paying a lot more than the actual price of your purchase. However, EMI schemes work well for big ticket purchases, such as a fridge, a washing machine or other such home appliances.
Since you don’t have to shell out a massive amount in one go, it is easy on your pocket. That being said, opting for EMIs tend to entice people to splurge first before making them pay more than the actual cost of a product. This isn’t exactly a healthy way to manage your finances.
Remember to evaluate all costs associated with the scheme and then choose or reject it. A great way to spend is to first save up. Why not open a Savings Account today to get started?