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How Can a No-Cost EMI Come Expensive?

Yes, that’s possible and it’s all mathematics. In this post, let’s understand how this can be. Before we go there, let’s do a quick recap of how No- cost EMIs work.

How No-Cost EMIs Work

  • You buy an item worth Rs X. You conclude for the No- cost EMI option( let’s say 6 months) on the payments runner.
  • You get an outspoken reduction of Rs Y from the trafficker similar that the loan of(X-Y) resulting in an EMI of X/ 6 at the prevailing rate of interest. generally, the brand or the trafficker bears the cost of the reduction.

Let’s understand this with an illustration. You make a purchase of Rs 25,000 and conclude for 6- a month No- cost EMI on the payments runner. You get an outspoken reduction of Rs921.2( assuming 13 sire interest) and your credit is charged Rs 24,078. After many days, your bank automatically converts the quantum into an EMI-grounded loan. And the EMI is Rs 4,166.7( 25,000/ 6) for 6 months. You pay Rs 25,000 over 6 months.

Understanding the Impact of GST

Well, you do pay a bit redundant. You’ll pay a little further than Rs 25,000 over the coming 6 months. How? Because GST is applicable on the interest portion of the EMI.

Now, this GST payment is redundant. Over 6 months, you pay GST of Rs 166 redundant. Hence, the total payment of Rs 25,166 and not Rs 25,000. still, 000 and the 6 EMIs as mentioned over), the GST element increases the cost from 0 to 2, If you consider this as IRR( loan of 25.27 sire So, really not a problem.
handed the loan term is 6 months and the loan interest rate is 13 sire, the GST element will increase the cost from 0 to 2.27 sire, irrespective of the purchase quantum.
Don’t Ignore the Processing figure and Ancillary Charges
easily, GST alone does make this precious. also, how can the No- cost of EMI come precious? Enter the processing figure or other ancillary charges. Let’s say so, for each No- cost EMI, you have to pay a figure of Rs 199( banning GST).

The processing figure increases the cost of No- cost EMI scheme( Rs 25,000 and the 6 EMIs) from the2.27 sire( due to GST alone) to5.52 sire
Then, the amount of purchase quantum plays a part. For a lower purchase quantum, the increase in effective cost will be advanced. Because the processing is irrespective of the loan quantum.

  • For the purchase quantum of Rs 10,000, the effective cost of No- cost EMI goes up to10.44 sire
  • For the purchase quantum of Rs 50,000, the effective cost goes up to only Rs3.89 sire
    I’ve taken the processing figure as just an illustration. The figure/ charge could come with a different title but the cost is cost. Before subscribing, you must be veritably clear about any ancillary charges.
    occasionally You Get Cashback on Full Payments
    Let’s say you enjoy an ICICI Amazon Pay Credit card. You want to buy a phone worth Rs 25,000. You have two options.
  • You pay outspoken. You get 5 cashback( for high members). Net cost = Rs 25,000 – 5 * 25,000( cashback) = Rs 23,750
  • You buy on No- cost EMI. As per the terms and conditions of the card, cashback isn’t available on EMI deals.

Hence, to get a sense of the true effective cost of No- cost EMI, we consider a loan quantum of Rs 23,750 and the six EMI( aggregate of 25,178 over 6 months). The cost shoots up to 20.37 sire
still, the cost jumps to 23 If we include the impact of processing figure.65 sire Now, that’s a precious loan.
By the way, you’ll have an analogous issue with the Flipkart Axis Bank card too.

How Does All This Matter?

It matters because unless you understand the true cost of purchase mode, you won’t be suitable to make the right choice. Let me give you many options.

  • Pay outspoken( no cashback)
  • Pay outspoken( 5 reduction/ cashback)
  • Take a loan from ABC bank at 13 sire for 6 months
  • Take a loan from FGH bank at 13 Sire for 6 months. outspoken 5 reductions.
  • No-cost EMI from LMN bank for 6 months
  • No-cost EMI from XYZ bank for 6 months( Processing figure of Rs 199)

It’s possible that a regular loan might turn out to be more cost-effective than a No- cost EMI loan.
And we can see, option 4 turned out to be the most stylish. You paid the least for this option. The outspoken reduction listed the balance in its favor.
By the way, you could pay outspoken( take 5 reduction/ cashback) and latterly ask your bank to convert this purchase into an EMI. I suggest you try out the effective cost.
Have the No- bring EMI schemes suddenly come bad? No, the schemes haven’t. Whether you conclude for an outright purchase or a loan is also a function of your cashflows. With No- cost EMI, you can spread out the cash exodus over many months, which is good. still, do look out for any interest charges. similar charges will increase the effective cost. also, look out for any reduction on full payments or on regular EMI payments. Unless your cashflows are a problem, this will probably be the stylish option.

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