The Truth Behind No Cost EMI Financing Option

No-cost EMI is a popular financing option that is offered by online and offline retailers on popular selling products like smartphones, laptops, and other electronic appliances. 

And, most of us often subscribe to the offer thinking it to be a good deal and better than paying cash upfront to buy the product. 

But, it’s not the case. No-cost EMIs are expensive and are structured differently than regular EMI transactions on credit cards. 

Experts say that they are just a marketing gimmick to attract customers to buy high-value ticket items.

Let’s understand in detail, how it works.

What is No-cost EMI?

You must be thinking, no-cost EMI means, no interest is included in the EMIs, but it’s not true, which most of us miss or fail to understand.

The interest component is included in the final price of the product before the calculation of the EMI amount but is camouflaged.

Then, why is it called No Cost EMI? 

Reserve Bank of India in 2013 banned banks and credit card companies from offering a 0% EMI scheme on retail products. In the circular, it said:

“Since the very concept of zero per cent 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.”

Therefore, to circumvent the order, banks and credit card companies introduced the No-cost EMI concept, which sounds like you don’t have to pay any interest on the loan. But, in reality, the bank takes away the discount offered on the product as interest and the retailer sells the product to you at the original MRP. 

Actual cost of the product
Rs 29,999
Discount offeredRs 2,999
Cost of the product after discount
Rs 27,000
Total interest to be paid under EMI
Rs 2,999
Amount to be paid by youRs 29,999

In the above example, the interest rate is close to 15%, which by any means is very high.

Many times, if the discount is not offered on the product, the interest component is added to the original price of the product and EMIs are calculated accordingly.

How No-Cost EMI Works?

It is an arrangement between the three stakeholders: the retailer, the bank/credit card company and the buyer and is available only on the selected product, which the retailer wants to sell faster.

In the transaction, the retailer offers the discount of the product as an interest to the bank. Therefore, on the purchase of the product by the customer, the bank pays the retailer the price minus the interest amount. And, the bank recovers the full price of the product from the customer in the form of EMIs.

Why is No-Cost EMI Popular?

No Cost EMI is a marketing ploy and also psychologically affects user’s buying behaviour. For example, you want to buy a smartphone and have a budget of Rs 15,000. But, you came across an offer, in which you are getting a phone with advanced features worth Rs 21,999 on no-cost EMI, where you have to pay Rs 7,333 for three months. In this case, most of the user’s will choose the latter, as it looks more affordable and will get a better phone.

For retailers, it helps to sell products faster and also a way to get out stocks before the new stocks come in.

Therefore, before choosing the no-cost EMI option, look for the actual cost you will pay and don’t end up buying a product you didn’t need that too at a higher cost.

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