What Is No-Cost EMI
An EMI or the equated monthly installment scheme is a type of loan that allows you to make fixed monthly payments over a specific period of time. A no-cost EMI offering is slightly different as it allows you to pay for an expensive product or service with almost no interest factored in.
EMIs are a great alternative to the traditional way of paying for a product or service in one lump sum. When you opt for a regular EMI plan, you sign up to pay only the product price over a fixed period with a high rate of interest charged as part of each installment.
On the other hand, a no-cost EMI plan, as the name implies, comes with the attraction of zero interest cost. The customer does not have to pay any interest on the amount that he or she borrows from the lender. They can be a great way to support big purchases.
How Do No-cost EMIs Work?
As we discussed, a no-cost EMI scheme allows you to repay your loan in equal installments over a fixed period of time without paying any interest on the amount. The borrower may need to pay an upfront fee for availing the no-cost EMI scheme, which can be paid as a lump sum at the time of application, or as part of the instalments paid every month
There are two main types of no-cost EMIs:
- Equating discount to interest on EMI
In this method, the retailer excludes any discount component from the price offered to the EMI seeker. For example, if a product is offered at a discounted rate to all customers, to the no-cost EMI seeker, it will be available at its regular price.
- When the installments are paid with interest built-in
This is a no-cost EMI that allows a customer to pay the interest on the EMI in equal installments over the term of the loan. This type of discount is offered by banks, non-banking financial companies (NBFCs) and other financial institutions to make the borrowing process easier for customers.
Law Relating to No-cost EMIs
The Reserve Bank of India (RBI) has issued notifications that clearly call out the hoax that is the no-cost EMI scheme. Its 2013 circular clarifies that zero percent interest or no-cost EMI is virtually non-existent. Experts claim that in no-cost EMI schemes, the interest amount is bundled in the product’s price. Retailers and lenders are also known to offer loans with zero interest and then sell goods or services at heavily inflated prices.
Even so, no-cost EMI schemes are quite popular among users.
Pros of No-Cost EMIs
Whether or not they include hidden charges, no-cost EMIs have been an attractive option for customers who are looking to buy expensive items like cars and appliances. For example, credit card users have the option to pay the full price upfront and then split them into equal monthly payments for a certain period of time.
Users prefer this type of financing because it can make things easier financially in the short term. They may not have enough money to pay for their purchase all at once, but they can afford to pay it off over time with monthly payments.
- No-cost EMIs not only provide a quick and easy way to get a loan but also a way for people with bad credit to be able to borrow money.
- Users do not have to explicitly pay interest on the amount borrowed.
- The processing or documentation charges involved are mostly nominal.
- Customers can enjoy this facility with multiple banks, retailers, and lenders.
- Opting for a limited number of smaller, no-cost loans can boost your credit score, provided you repay on time.
Banks, retailers, and lenders provide no-cost EMI to their customers for various reasons – but the main incentive is to get customers to buy their products or services.
- Banks get to attract more customers and retain them for a long time.
- Retailers are able to sell more products and make the users feel happy about their purchase.
- Lenders use them as a promotional tool for their loan products.
Cons of No-Cost EMIs
Of course, there is no such thing as a free lunch. No-cost EMIs have their own share of drawbacks.
- As outlined earlier, experts agree that most no-cost EMI schemes are a farce, as the interest is somehow factored into the EMI – usually in the processing fee
- Customers may end up paying more than what they originally agreed to pay if they cannot keep up with their monthly payments, on account of high interest rates, late fees and tax on interest paid
- Outstanding EMIs can make it difficult to qualify for fresh credit and even if availed, the interest rates can be very high
- Customers do not know exactly what their credit card will be charged until after they purchase the product, which can lead to unwanted surprises on their credit card statement
What to Look Out for While Opting for No-Cost EMIs
- Processing fee – a hidden cost
No-cost EMI is an attractive scheme that is offered by many banks. However, it has charges applicable to it. The bank may charge the customer a processing fee of up to Rs. 500, which is not mentioned in the offer and may not be known to the customer.
- The temporary decline of your credit limit
Users can’t opt for a no-cost EMI if their credit score is less than 700. They need to also make sure that they have enough cash in hand and can afford the monthly repayments. Finally, it’s important to understand how long the loan tenure should be, as outstanding payments may affect further credit availability.
- Debt trap?
With easy financing options available, a lot of people have become compulsive spenders. It’s important that you identify the reasons that could cause you to fall into a debt trap. As a rule of thumb, if your total EMI amount exceeds 50% of your income, it’s time to take a pause and rethink your financial standing.
- Timely repayment
It is essential for every buyer to make the EMI payment on time. If not, your credit scores can take a hit. Maintaining your credit score is essential if and when you apply for a new loan. Late fee penalties can also be applied for failing to meet EMI timelines.
Bottom Line
No-cost EMI is a form of financing that allows customers to purchase an item and pay for it through monthly installments in case they cannot afford a full upfront payment. Cost or no-cost, EMIs are a favourable option for buyers due to a multitude of reasons. However, there are many pros and cons to this kind of system, which should be thoroughly evaluated before making the decision to opt for it.
Consider factors like the below:
- A “no-cost” EMI loan is still a loan, and needs to be treated with such seriousness in terms of its impact on your credit score
- If you don’t make your monthly payments on time, the late fee and surcharges can cause you to spend a higher amount than the original price of the item or loan amount
- Unplanned or impulse buying items on no-cost EMI can lead to debt traps that can be difficult to overcome
As a user, you should always be aware of the charges applicable on your “no-cost” EMI. If any form of interest is applicable, you should know what the rate of interest is and how it is calculated. Charges could include processing fees, late payment fees, and early repayment penalties. Be sure to do your research and understand the terms and conditions before you agree to anything.
As a planned purchaser, you can use no-cost EMIs to your benefit, making affordable monthly payments while still enjoying your purchase at little or no additional cost.
