No Cost EMI, A Boon or Bane?
What is the actual cost of EMI we pay?
India, a country that caters to a large number of festivals attracts a large number of retailers, being online or offline have come up with offers like No-cost EMI or Zero-cost EMI on products like mobile phones and various other electronic appliances. When an individual buys a certain product on EMI, it takes away the burden of paying the huge cost at that particular period of time. But, on the contrary, one should beware that there is always a cost to be paid on these ‘No-cost EMIs’ as well. No-cost EMI sounds like you don’t have to pay any interest on the loan amount, but in reality you do. Mr. Rajiv M. Ranjan, founder, chairman and the managing director of PaisaDukan.com says that companies and retailers give an upfront discount or offer cashback or other such scheme which is equivalent to the amount of interest to be paid. The term interest is hidden or overlapped by other such charges or schemes. So, No-cost EMI is basically termed as a misnomer as the interest on the loan is added up to the EMI except that the break up may not be clearly visible to the buyer on the other hand. As per 2013, RBI states that the concept of no-cost EMI is non-existent because the schemes offered on zero-cost EMI on credit outstandings, the interest part is kept hidden and showed as processing fees, other expenses, etc. to the customers thereby. Research says that, the actual interest rate charged on such zero-cost loans is very high ranging between 16-22%. Despite of continuous demands for fair practices that the processing charges, ROI and other fees should be charged uniformly, such schemes only result into alluring and exploiting the customers. ROI is generally kept flat and is not the same in case of customer profile in the retail markets. How does NO-COST EMI work?
There are two ways through which the scheme of no-cost EMI works, explains Mr. Gaurav Gupta, founder and CEO of My Loan Care. Most of the online e-commerce portals offer discounts to the customers and then pays this amount to the financial institutions like banks, finance houses, etc. In order to cover up their interest cost. So, in this case the amount offered for discount is equivalent to the amount of interest to be paid. The second way through which this scheme works is the one in which the amount of interest which is to be paid is already added to the price of the product. These are inner strategies which are not visible in the outer part but one may find these differences when the look forward deeper in the terms and conditions of the deal.
Should one opt for No-cost EMI?
A large number of banks, online and offline retailers in the market don’t want to offer a direct discount in order to maintain their product portfolio and also the lack of cash upfront within the customers. Thus in most of the scenarios, the discount is higher on EMI than the discount allowed on cash. It is not advisable to opt for loans to buy white money goods but it might work for you in a positive way if the product comes with a discount. However, one should make sure that he/she may not get trapped in these marketing tactics where they end up buying a product at a higher cost.
-Pragati Bhimani
The Endeavour Editorial Club 