No-Cost EMI On Credit Card? Not Really. Hidden Costs Every Shopper Must Know
The allure of "no-cost EMI" (Equated Monthly Installments) on credit cards is strong, especially when eyeing a big-ticket purchase. The promise of spreading payments over several months without incurring extra interest seems like a smart financial move. However, a closer look reveals that "no-cost EMI" is often a marketing tactic that masks various hidden costs. As the festive season approaches, retailers and e-commerce platforms are heavily promoting these offers, making it crucial for shoppers to understand the fine print before committing.
The Illusion of Zero Cost
The Reserve Bank of India (RBI) has previously stated that the concept of a "zero percent interest" loan is non-existent. Financial experts agree, emphasizing that lenders cannot offer interest-free credit. So, how do "no-cost EMI" schemes work? The interest is either built into the product's price, the upfront discount is reduced, or it is recovered through processing fees.
Hidden Costs Unveiled
Several hidden costs can turn a seemingly "no-cost" EMI into a more expensive option than a regular purchase. These include:
- Processing Fees: Lenders often levy a one-time processing fee, ranging from 1% to 2% of the product value. Some banks like ICICI Bank and HDFC Bank apply processing fees, with added GST.
- GST on Interest Component: Even if the interest is technically "zero," the bank charges interest and gives an equivalent discount. However, 18% GST applies to the interest component.
- Loss of Discounts: The "no-cost EMI" offer might come at the cost of foregoing a potentially higher cash discount available on outright purchase.
- Down Payment: Some plans require a down payment, especially for high-value items.
- Prepayment Charges: Foreclosing the loan before the tenure ends may attract prepayment penalties.
- Missed Reward Points/Cashback: Paying through "no-cost EMI" may disqualify you from earning credit card rewards points, cashback, or milestone benefits.
- Increased Product Price: The interest cost is sometimes embedded in the product's selling price.
- Impact on Credit Limit: The EMI amount reduces the available credit limit until the loan is fully repaid.
- Late Payment Fees: Missing an EMI payment attracts late fees and penal interest, and the delay will be reported to credit bureaus.
How "No-Cost EMI" Works
In a "no-cost EMI" arrangement, the interest isn't waived but is absorbed by the manufacturer or dealer through an upfront discount. For example, if an appliance worth ₹30,000 carries a 12% annual interest, the manufacturer may adjust the price or offer a discount equivalent to the interest amount. While the EMI is created with interest, the discount balances it out, so the buyer effectively pays the original price of the product.
The Fine Print
Before opting for a "no-cost EMI," carefully examine the terms and conditions. Check for hidden charges, processing fees, prepayment penalties, and late payment charges. Compare the total cost of ownership with other payment methods, including outright purchase with available discounts. Consider the impact on your credit limit and potential loss of reward points.
Responsible Usage
While "no-cost EMIs" can be helpful for managing large expenses, they should be used judiciously. Avoid impulsive purchases and ensure you can comfortably afford the monthly payments. Remember that converting purchases into EMIs may make your life easier, but there is a need to be responsible. Debt can go out of hand quite quickly. By understanding the hidden costs and using credit card EMIs responsibly, you can make informed financial decisions and avoid falling into a debt trap.
