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Learn how a no-cost EMI works

how does a no cost EMI work?

Retailers often promote the concept of “no-cost EMIs” (equated monthly installments) to facilitate the purchase of high-value items, like laptops, phones, and appliances. This financing option is especially appealing to individuals who may find it challenging to make a one-time payment for these products. No-cost EMIs differ from standard EMIs, as they do not include any interest charges for the customer. In essence, customers pay only the actual cost of the product in monthly installments. The no-cost EMI is a collaborative arrangement between retailers, banks, and customers, offering benefits to all parties involved.

How No-Cost EMIs Work

Contrary to its name, customers opting for no-cost EMIs do incur some costs, depending on the product’s pricing.

Retailers typically offer two options under this scheme:

  1. Equating Discount to Interest on EMI: In this option, the retailer does not provide any discount to customers who wish to pay in full for a product. Instead, they offer the same product at its full price with an EMI payment option, allowing customers to pay the price in monthly installments. For example, if a customer wants to purchase a ₹15,000 mobile phone and could get a 10% discount for an outright purchase, in a no-cost EMI, the retailer offers the same product at the full price, allowing customers to pay it off in installments.
  2. Interest Included in Product Price: Some retailers include the interest component in the actual product price and present it as a no-cost EMI. For instance, a retailer may sell a mobile phone for ₹15,000 and offer a no-cost EMI option. However, they may include the bank’s interest charges (e.g., ₹1,500) in the product’s price, resulting in a retail price of ₹16,500 (₹15,000 + ₹1,500). Customers can purchase the item at ₹16,500 under the no-cost EMI tag, even though the bank charges interest.

In both scenarios, customers pay the full price for the product over time, with some interest and additional charges included.

Advantages of No-Cost EMIs

No-cost EMIs offer several benefits to customers:

Cash Flow Management: They enable customers to manage their cash flow constraints when buying high-value items.

Credit Building: Opting for no-cost EMIs can help build a credit history as customers take smaller loans and repay EMIs on time.

Limitations and Disadvantages of No-Cost EMIs

While no-cost EMIs have their advantages, there are certain limitations and disadvantages to consider:

Limited Availability: Not all retailers and banks offer no-cost EMIs, and such offers apply only to specific products.

Credit Card Requirement: Some schemes may require customers to have a credit card.

Additional Charges: Customers may need to pay processing fees, service taxes, and other applicable taxes for the transactions.

Refund Implications: If a product is returned and refunded, customers may still lose money on the interest.

Credit Score Impact: Failure to repay an EMI on time can negatively affect a customer’s credit score.

Hence, it’s crucial for customers to thoroughly understand the terms and conditions, as well as the fine print, associated with no-cost EMIs. While these schemes make it more affordable to purchase high-value items, customers should exercise financial prudence and only use them for essential products that fit within their means, rather than indulging in purchases solely for status symbols. Abiding by the terms and making timely repayments are essential for making the most of the no-cost EMI option.

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