The Actual Cost of No-Cost EMI

The ‘no-cost EMI’ option seems to be luring since you do not need to pay any extra amount. In reality, this EMI option might not be exactly a ‘no-cost’ scheme. Let us understand what this scheme is all about and what is the actual cost of No-cost EMI.

Do you want to buy a phone worth 50,000 rupees? But you do not have the money to afford it right away. You want to explore more options to see if you can find the same model at lower prices. As you are exploring the product online, you see an option to buy that phone at  ‘no-cost EMI’. As per the scheme, you can buy that phone without actually paying 50,000 rupees and you do not even need to pay any interest. Sounds interesting, right? 

Table of Contents

• What is No-Cost EMI?
• How does it work for sellers and banks?
• Why is No-Cost EMI actually more costly?
• Should you buy Products on No-Cost EMI?

What is No-Cost EMI?

“According to the definition, ‘no-cost EMI’ is an instalment scheme in which you do not need to pay any extra amount on the purchase made. You are only required to pay the actual cost in parts on a regular basis without paying any additional interest. This seems like a great purchasing option for those who cannot afford to pay the entire amount in one go and are short of funds.” Let us understand this with an example.

For example, you are buying a phone worth rupees 20,000 through the ‘no-cost EMI’ option. You can buy the phone through one of the two ‘no-cost EMI’ options. The first option is a 12 month EMI plan, according to which you need to pay 1667 rupees as monthly EMI. The second option offers an upfront discount of 2,000 rupees but you would need to pay 1,834 as monthly EMI. This will also be equivalent to 20,000 rupees since you are getting back 2,000 rupees as a discount. Through one of these options, you will be able to own the phone without actually paying the entire amount in a single payment.

How Does It Work For Sellers and Banks?

So, how does this EMI scheme benefit sellers? Take a look at this example to understand how ‘no-cost EMI’ actually works.

Suppose, the manufacturer is offering the phone at 40,000 rupees to the seller. The phone has an MRP of 50,000 rupees which allows the seller to earn a maximum of 10,000 rupees as profit. If the seller sells 100 units of the phone at MRP, the profit will be 10 lakh rupees.

• Now, a financial institution approaches the seller offering a scheme to make more profit. The institution asks the seller to offer buyers with ‘no-cost EMI’ options on the phone in return for 3,000 rupees per unit as its share.
• The seller will be earning a profit of 7,000 rupees per phone and the institution will be earning 3,000 rupees per phone.
• Since more people will be able to afford the same phone through this EMI option, the same seller will now be selling more phones, say 200 units.
• This means that the seller is earning a profit equivalent to 14 lakh rupees. This profit is 4 lakh rupees more than before when the seller was selling 100 units.
• Banks charge a percentage of EMI from buyers which varies between 1-3% according to the terms and conditions.
• Banks also levy tax on discounts offered by sellers as per the applicable GST rate.

In short, the seller is able to sell more units and thus, earn more profit. This will allow sellers to bring in fresh stock as well and sell less popular products. 

Why is No-Cost EMI Actually More Costly?

As per the RBI’s circular of September 2013; there is no such thing as ‘No-cost EMI’. The RBI banned sellers from offering 0% EMI schemes on retail products since it does not allow lenders to offer loans below a stipulated base rate. This means that legally, no lender is allowed to offer interest-free loans. This scheme is a marketing tactic to attract more buyers. 

As a buyer, you believe that you are not paying any extra amount since there is no upfront payment of interest. In reality, these EMI options have shorter tenure and hidden costs. The seller is actually receiving more rate of interest since the overall expense of the loan is higher than what is apparent. 

Most ‘no-cost EMI’ schemes require processing fees through which the seller recovers the discounted amount and the interest. The price of the products that are offered on this option usually includes the interest amount. Sellers can easily earn profits through the pricing of such products. 

Usually, sellers offer ‘no-cost EMI’ on products that they want to sell faster. They can sell outdated or less popular products through this option as more people can buy that product. This EMI option has shorter repayment tenure with a higher rate of interest. Many times, this scheme is a combination of ‘no-cost EMI’ and regular EMIs for certain time periods. When the cycle of regular EMI starts, the interest rate can skyrocket to even 24% which is quite high.

Should You Buy Products on ‘No-Cost EMI’?

‘No-cost EMI’ is a great option for those who have an urgent need for the product but are unable to pay the entire amount at once. Through this EMI option, the buyer can own the product by paying the amounts in parts. This reduces the burden of paying the entire amount.

Certain products are offered at discounted rates with this scheme. As a buyer, you can actually benefit from this option. You can save more money since you have no burden of paying the entire amount in a single payment. This option is also beneficial when you need to make more than one purchase. You will be able to buy two things instead of one without paying the full price for both purchases.

This option might not be suitable if you are buying an outdated product at a higher price. If the new model of that product is a month away from release, then you can wait till the release of that model. 

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Conclusion

The ‘no-cost EMI’ option has its own share of pros and cons. For sellers, it has definitely more benefits as they can earn more profit and sell products that are otherwise not selling as expected. As a buyer, it is up to your discretion whether you absolutely need to buy that product through this option. It is also important to do your calculation beforehand so that you can wisely buy the product by leveraging this option.

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