Is No-Cost EMI Really No-Cost?

With the onset of the festive season, retailers, both online and offline, offer various products like mobile phones, refrigerators, etc. on no-cost EMI or zero-cost EMI.

While purchasing expensive products on no-cost equated monthly instalments (EMI) without any interest may sound attractive as it removes the burden of paying the entire amount upfront, you must note that in reality, there is always a cost that you will have to bear on such no-cost EMI schemes.

Hence, it is important that you know the real cost of such no-cost EMI schemes.

Normally, when you opt for a regular EMI, you will have to make monthly repayments that will include the principal amount and a pre-decided interest rate. Here the details of the interest charged are mentioned clearly while availing the EMI scheme.

On the other hand, when you opt for a no-cost EMI, the lender gives you a pre-decided credit limit to convert your purchases into EMIs. Now, since the lender cannot charge an interest directly, the interest is included indirectly by charging you a higher price on the product, which you would have otherwise received on a discount. Many lenders may also charge a processing fee on a no-cost EMI. This allows them to charge the interest indirectly.

You must also keep in mind that you will need to pay a GST at the rate of 18% on the interest to the lender even when you opt for a no-cost EMI.

As per its circular dated September 17, 2013, the Reserve Bank of India (RBI) says that the concept of no-cost EMIs or zero percent EMIs is non-existent. The circular 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 RoI (rate of interest) 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.”

Now, we know that no-cost EMIs or zero percent EMIs are nothing but marketing gimmicks to allure customers. The interest cost of the loan is indirectly built into the EMI, even though the break-up may not be visible to you upfront. Hence, you must look deeper into the terms and conditions of the no-cost EMI scheme to get the finer details of the cost.

Another popular payment scheme online and offline retailers offer during the festive season is the ‘Buy Now, Pay Later’ scheme. Know more about this scheme here- Buy Now, Pay Later: Should You Opt For This Option?