No-cost EMIs entail an interest subvention between merchants and lenders, allowing purchasers to get EMI choices with a zero effective interest rate. Customers can purchase a product in instalments rather than making the full payment upfront, and they are not required to pay any additional interest. As a result of the staggered payments, anticipated high-ticket purchases become more manageable, and hence the monthly budget of the buyers is not pressured. However, there are several downsides to the no-cost EMI arrangement.
The initial catch here is that the interest expense is not waived; it is borne by the product’s manufacturer or by the merchant rather than the buyer.
No-cost EMI is not widely accessible. Also, customers may be required to pay a processing fee or other hidden costs at times. Customers may also miss out on discounts that they would have received if they had paid the full amount and purchased the product. At instances, the interest cost is added to the product price, and the consumer is required to pay the higher price in instalments.
Let’s look at the math of no-cost EMI using a simple example. Assume you want to buy a cell phone priced Rs. 50,000. The interest cost is 12%. You are given a six-month EMI plan with an interest rate of Rs. 3,000.
Scenario 1: The manufacturer and merchant reduce their profit margins to pay the interest.
Scenario 2: The merchant (who would have given you a Rs. 3,000 discount if you had paid beforehand) pays this interest amount to the bank (with whom it has a tie-up for this no-cost EMI scheme). So, ideally you would have got this product for Rs. 47,000, but with this no-cost EMI scheme, you shall get it at Rs. 50,000, with no discounts.
Scenario 3: Interest is added to the product’s price (which goes up to Rs. 53,000); hence the buyer is asked to pay this increased sum in six instalments (Rs. 8,833 each month, rather than the initial Rs. 8,333 each – an extra 500 rupees paid every month for the six months).
So, it is anyways best to avoid such no-cost EMI offers, which is less beneficial to the buyers.
