The 'No-Cost EMI' Illusion
Many jewellers and banks advertise "no-cost EMI" schemes, which sound like a dream. However, this term can be misleading. Often, the interest cost is bundled into the price of the jewellery. You might lose out on a discount that would have been available
for an upfront payment. For instance, a jeweller might offer a 10% discount for a cash purchase but waive that discount for an EMI transaction. In effect, that forfeited discount becomes your interest payment. Always ask for the final price for both upfront payment and EMI to see the real difference.
Processing and Documentation Fees
When you opt for an EMI plan, it is typically facilitated by a bank or a Non-Banking Financial Company (NBFC), not the jeweller directly. These financial institutions often charge a one-time processing fee to set up the loan. This fee can range from 1% to 3% of the loan amount and is usually deducted upfront or added to your first EMI. While it may seem small, on a large purchase, this fee adds a significant amount to your initial outflow. Always read the loan agreement carefully to identify any such administrative or documentation charges.
Understanding the GST Component
Goods and Services Tax (GST) is a mandatory cost that applies regardless of your payment method. When you buy gold jewellery, you pay 3% GST on the value of the gold and 5% GST on the making charges. When you finance this purchase through an EMI, you are essentially taking a loan for the entire amount, including the GST and making charges. This means your total loan amount is higher, and you are effectively paying interest on the tax component as well, further increasing the overall cost of your purchase over the tenure of the loan.
The Impact of Making Charges
Making charges, which can range from 10% to over 25% of the gold's value, are a substantial part of any jewellery bill. When you convert a purchase to EMI, you are also financing these charges. It's crucial to remember that making charges have zero resale value. So, if you buy a piece for ₹1,00,000 where making charges are ₹20,000, you are taking a loan on the full amount, but the recoverable value of your asset is only around ₹80,000 at the time of purchase. High making charges inflate your loan principal without adding to the intrinsic value of your gold.
Penalties for Prepayment or Foreclosure
You might decide to pay off your EMI loan earlier than planned if you come into some extra funds. However, many lenders impose a foreclosure or prepayment penalty for this. These charges can be a percentage of the outstanding principal amount, often around 1% to 3%. Before signing up for an EMI, it's wise to check the terms and conditions related to early repayment. Some lenders may not have these charges, or they might waive them after a certain period, which could offer you more flexibility in the long run.
Your Credit Score is at Stake
A gold jewellery EMI is treated like any other personal loan by credit bureaus. Timely payment of your monthly instalments can help build a positive credit history. Conversely, any delay or default in payment will be reported and can negatively impact your credit score, making it harder to secure loans in the future. It's essential to ensure the EMI amount is comfortably within your monthly budget before committing to the purchase to avoid financial strain and protect your creditworthiness.
