Unmasking 'No-Cost EMI'
The term 'No-Cost EMI' is a powerful marketing tool, suggesting you pay zero interest. However, this is often a financial illusion. The Reserve Bank of India banned true zero-percent interest schemes in 2013. So, how does it work? Often, the interest amount
is bundled into the product's price or presented as a foregone discount. If you paid in full, you might have received a discount, but by choosing EMI, you lose that benefit. The cost is still there, just hidden. You effectively pay interest in the form of a higher price or a lost saving opportunity.
The Processing Fee and Other Charges
Nearly every EMI plan, including 'no-cost' ones, comes with a non-refundable processing fee. This one-time charge, often between ₹199 and a percentage of the loan amount, is added at the beginning. Furthermore, there is an 18% Goods and Services Tax (GST) that is usually applied to both the processing fee and the interest component of your EMI. Even if the interest is subsidised by the merchant in a no-cost scheme, banks internally book it, and the GST on that interest is passed on to you.
Calculate the Total Outflow, Not Just the EMI
Focusing only on the small monthly payment is a common mistake. To understand the real cost, always calculate the total amount you will pay over the entire tenure. This includes the principal, all interest, processing fees, and GST. Compare this final figure with the product's upfront price. You might discover that the convenience of an EMI comes at a significant premium. A longer tenure reduces the monthly EMI but increases the total interest you pay over the loan's lifetime.
Beware of Pre-closure Penalties
What if you get a bonus and want to pay off your loan early? Many lenders charge a pre-closure or foreclosure penalty for this. This fee can range from 2% to 5% of the outstanding principal amount, plus GST. Lenders impose this because they lose out on the interest they expected to earn over the full tenure. Before signing up, always check the terms for pre-payment penalties. Some credit card EMIs and loan products offer zero pre-closure charges, which provides valuable flexibility.
Your Credit Score is on the Line
Taking an EMI, whether through a credit card or debit card, is a form of loan and is reported to credit bureaus like CIBIL. Paying your EMIs on time is an excellent way to build a positive credit history, which is crucial for securing bigger loans (like for a home or car) in the future. However, the opposite is also true. Missing even a single EMI payment can negatively impact your credit score, making future borrowing more difficult and expensive. Lenders report defaults after 30 days, and this stays on your record.
The Impact on Your Credit Limit
When you make a purchase using a credit card EMI, the entire price of the product is blocked from your available credit limit, not just the EMI amount. For instance, if you buy a ₹50,000 phone on a card with a ₹1,00,000 limit, your available credit immediately drops to ₹50,000. This reduced limit can affect your ability to make other purchases and might increase your credit utilisation ratio, which can also temporarily lower your credit score. The limit is gradually restored as you pay each month's EMI.
