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    What is the actual cost of 'No-cost EMI' you pay?

    Story outline

    • While buying a product on EMI takes away the burden of paying the huge cost upfront, there is always a cost that one has to bear on these 'no-cost EMI' schemes.
    • 'No cost EMIs' is a misnomer because interest on the loan is built into the EMI except that the break up may not be clearly visible to the buyer upfront.
    Decoded: The actual cost of ‘No-cost EMI’ you pay
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    With the start of the festival season, many online and offline retailers are currently offering 'No-cost EMI' or 'Zero Cost EMI' on products like mobile phones, electronic appliances, and so on.

    While buying a product on equated monthly instalments (EMI) takes away the burden of paying the huge cost upfront, one should remember that there is always a cost that one has to bear on these 'no-cost EMI' schemes. Therefore, it is important to know the actual cost of such 'no-cost EMI'/'zero-cost EMI' schemes.

    Gaurav Gupta, Founder & CEO, MyLoanCare, an online platform for availing loans and credit cards, says, "Most offline and online retailers tie up with certain financial institutions offering consumer durable loans to buy electronic appliances, gadgets and so on. While these are marketed as 'zero cost loans', the actual interest rate charged on such loans is usually very high ranging between 16 per cent and 24 per cent. "

    What does the law say?
    The Reserve Bank of India (RBI) in its circular in 2013, has said that the concept of zero per cent interest is non-existent. The circular dated September 17, 2013 says, "In the zero percent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to customer in the form of 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 the 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."

    How does the scheme work?
    As said in the central bank's circular, zero per cent interest schemes are just a marketing gimmick and the interest cost in some way is passed on to the customers. There are two ways in which these schemes work, explains Gupta. One of the ways often used by online shopping platforms is to forego the discount that they would have offered to you (if you have paid the amount upfront) and instead pay this amount to the bank or financial institution to cover the interest cost. Another way is by adding the interest cost in the price of the product.

    Here's a look at how these schemes work.

    a) When a discount is equivalent to interest
    The most popular way through which online e-tailers offer 'No-cost EMI' is by offering discounts equivalent to the total amount of interest to be paid.

    Suppose the phone you want to buy costs Rs 15,000. Under the three-month EMI plan, the interest rate charged is 15 per cent and you would have to pay an interest amount of Rs 2,250.

    Here's how the 'No-cost EMI plan' on the online platforms will work:

    'No-cost EMI' offers on the online retailers
    Cost of Mobile Phone Rs 15,000
    Discount offered (Rs 2,250)
    Cost of Mobile phone post discount Rs 12,750
    Total interest to be paid under EMI (In case of purchase on EMI) Rs 2,250
    Total amount to be paid by you Rs 15,000

    Essentially, you pay the original price of the phone in instalments: the retailer gets the discounted price and the balance (i.e., the 'discount amount') goes to pay the interest on the loan. Actually, the total price you pay gets divided into price paid to retailer plus interest paid to financier. Except that this break up may not be shown upfront. If you were to offer to pay the retailer the full price of the phone upfront, you may be able to get the phone at a discounted price of Rs 12,750.

    Thus, as you have taken a three month EMI plan, after subtracting the discount and adding interest cost, you will be paying an EMI of Rs 5,000 for three months.

    b) When the interest amount is added to the product price
    Gupta says, "Another way in which such schemes work is by adding the interest cost to the price of the product." Let us say the product costs Rs 15,000. The retailer offers you this product under the 'No-cost EMI' plan for Rs 17, 250. Here the interest of Rs 2,250 is already added to the cost of your product and will be paid by you as you repay the loan.

    Interest is added to product cost
    Actual Cost of the product Rs 15,000
    Interest to be paid while buying on EMI Rs 2,250
    Offer Price under Zero Cost EMI Scheme Rs 17,250
    Total Cost to be paid by you via EMI Rs 17,250

    Therefore, if you have taken a three month EMI plan, then the amount payable by you will be Rs 5,750.

    Actually, 'No cost EMIs' is a misnomer because cost or interest on the loan is built into the EMI except that the break up may not be clearly visible to the buyer upfront. You may find the details if you look deeper into the terms and conditions of the deal.

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    39 Comments on this Story

    Suresh Sreenivasa Pai559 days ago
    shame on the editor for posting this one
    Chantura 559 days ago
    Just to clarify you mr writer
    If you buy a phone at cost of 14000 rupees,
    And you are buying at no cost emi the retailers reduces the prices by the amount of interest you will pay to cc..
    So whether you pay upfront or in emi, you pay same price and no way higher.
    Also not everyone has the economic condition to pay everything upfront hence this scheme is definitely a boon for those buyers.
    Just that only the gst amount on that interest is additional that the buyer pays which could be less than 50 rupees per month for a 14000 phone. Hence No cost EMI is better option to buy things...
    Raghavendra Ponde559 days ago
    By offering same price to EMI or by direct payment the retailers are luring you to opt for EMI basis as he definitely know public purchase it in EMI mode only. Companies want to promote EMI basis as like in western countries so that you will be addicted and when you don''t have money you will purchase the goods whether it is Diwali or dussera or your own birthday.
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