No Cost EMI is a recently introduced concept by E-Commerce companies to tap the customers. Generally, these days every online shopping portal attracts their customer with this concept of discount. Other than this, they also offer different types of lucrative discount offers like bank discounts, discounts for using Credit cards for purchasing, and exchange offers.
What is no-cost EMI?
This concept was initially introduced by Flipkart in online stores, and this concept is now promoted by all the major giants like Amazon and Flipkart on all its products. This option allows the customer to purchase expensive goods online without paying the whole amount upfront. Here you can pay the amount in easy and equal monthly installments.
This No Cost EMI is actually the same EMI option that we perceive in general, but with some additional discounts given upfront by the agency to attract customers. An equated monthly installment (EMI) is a tool by which we can pay the loan in its entirety with fixed small installments over a period of time. The EMI concept is equally applicable to both the Principal and the interest amounts so that the total amount payable by the borrower gets paid in monthly installments. Through this option, you don’t have to pay the entire amount of your purchase up front, instead, you can pay the amount in the number of months selected by you while making the purchase.
We know a bit about EMI, but as far as ‘No Cost EMI’ is concerned, we people have less knowledge. As its name suggests, we assume that here also we can make the payment in equal installments but without any interest as it was in EMI. But wait, this assumption is not true in its sense and is a half-truth. Because the central bank or RBI which actually works as guardian and supervisor of all banks clarifies that there is no such concept as a Loan without interest or of zero percent interest. This interest is not shown to customers and is passed to them in the form of processing fees. As the bank clearly denied this concept in actuality, so this interest can be passed to us as a customer in two ways by the companies. The first one is to add this interest amount to the cost of the item even before displaying it to customers, or else secondly, to waive off the discount for which the customer is liable and credit the same to the banks or financial institutions upfront.
How does no-cost EMI works?
As the central bank already clarified about this concept that there is no method by which any bank should offer a loan to the customer without interest. But if you see Amazon and Flipkart, you will see that both these portals are providing ‘No Cost EMI’, so how they are going for it?
Actually, they are offering a discount equal to the interest liable to be charged by the bank or financial institutions. So, these portals transfer this discount amount to these financial institutions beforehand. If you are not selecting this option and going for a simple EMI option over credit cards or debit cards, in that case, you will be charged with interest ranging from 12 to 15% depending on the banks. In this case, the interest charges will be transferred to the institutions whenever you are debited with an amount equal to the EMI amount.
Hope it made you understand this concept, if not let’s further discuss it with an example:
Suppose you as a customer, want to buy any product from these online portals with a price tag of Rs 50,000:-So if you are opting for a three or six months EMI plan with the credit cards, and your credit card issuer agency is charging 15% over the amount as interest. So, you have to pay Rs 7500 as interest. But as you are paying all the amount upfront, so you will get this product for Rs 42500 because the 7500 is discounted to you for this upfront payment and the same will be transferred to the financial institutions. But if you choose to pay through a No-cost EMI option, that case, you will be paying the whole 50000 in six monthly installments. Here, the interest amount will be paid to the banks, and the rest amount to the seller.
The myth behind No-Cost EMI
No Cost EMI is a popular and lucrative way to attract customers to make purchases, where discounts offered are generally equal to the interest amount to be paid. In the above example, the interest charged is at 15%, so the interest to be paid is 7500, and the company will offer you a discount of 7500 upfront. Hence this method is called No cost EMI because of the first reason explained above, as they are charging no extra cost for the process. Here these E-Commerce sites are paying an amount equal to the interest amount as a discount upfront to the customer.
No cost EMI on Credit and Debit card
Nowadays, customers are using this option of paying the price of the product with credit and debit cards in large numbers. As we have already discussed that amount will be paid upfront in case of ‘No Cost EMI’, so how this option works when you are making payments using Plastic Money like Credit Cards and Debit Cards?
No Cost EMI against Credit Cards
In the case of Credit Cards, the total amount will be paid beforehand to the seller and we will understand it better with the above-discussed example only. Here full amount i.e 50000 will be blocked against your credit card, and if you have a total limit of the card is 2 Lakh then 1,50000 will only be available to you after this purchase. Your limit will be restored to the full amount once you paid all the due installments timely. Every month, your credit card limit will be increased by the amount equal to the EMI amount and it will be restored to full after the completion of EMI tenure.
No Cost EMI against Debit Cards
If you are planning to pay with your Debit cards, in that case, the whole amount (50000) will be debited from your account once and again credited back to your account in some days. After this, your transactional amount will be converted to EMI by your bank. As, in this case, you will be debited with the total amount once before restoration, you must have that amount in your bank account.
Advantages of no-cost EMI
There must be some reasons why online merchants are offering no-cost EMI in tie-ups with major banks in the country. Below are the advantages or the reasons for offering no-cost EMI:
You can buy expensive products without having enough amount in your bank account.
You can easily pay the amount of the product through small and affordable monthly installments.
Paying in small installments will improve your Personal Finance.
You have the liberty to choose your payback period by selecting the tenure of your EMI.
Disadvantages of no-cost EMI
Paying the amount in equal monthly installments is an easy and lucrative method, is it not? But it also has its disadvantages:
Sometimes, you are subjected to a processing fee in case of opting for EMI options.
The total cost of the product can be higher sometimes when compared with the non-EMI option.
You will be charged with GST applicable on every installment which makes the cost further costly.
The refund option in the EMI case is also not so easy.
You can be subjected to the processing fees if any, even if you have returned the product or canceled the order.
Final and the biggest disadvantage of an EMI option is that it actually works as a trap in way for customers to buy costly products which can be avoided sometimes.
Unnecessary Spending is the one concept associated with the usage of Plastic Money and so with EMI, which affects your Personal Finance and Budgeting very badly.
Whether to Go for no-cost EMI or not?
It is very basic that before going for any purchase, you should have enough balance in your bank account. But with the arrival of this EMI option, you can compromise on this front. But then also, if in any circumstances you failed to pay timely, you will be charged heavily by the banks. So, it’s better that you should have enough balance or at least finance planning so that it will make you pay the installments timely. If you can pay the premium timely, it is advisable to go for EMI and if not, you should avoid it.