In the last newsletter, we discussed how brands use marketing tactics to make you feel you got the best deal on sales day. And they don’t stop right there. They go one step further to provide you with No-cost/Zero-cost EMI so you can shop more freely.
But as we say, there is no free lunch in this world. Is no-cost EMI an exception to this? Let’s find out.
Estimated read time: 2 minutes and 55 seconds
Buckle up, here we go!
Creating demand and then reducing the friction in the purchase process increases the sales for the brands.
And money is a giant friction while shopping. On shopping day, most of us make an instant decision to buy something. But after selecting the product, the first thing that comes to mind is how to pay for it.
If the price range of the product is high, most of us leave the product in the cart on online shopping sites.
So brands offer no-cost EMI so that you can freely purchase the product as they split your purchase bill into 3 to 24 months.
But how do a No-cost EMI works?
When you don’t buy a product because of a high price, the seller losses on sales. And the bank doesn’t make any money too.
So they both make a deal to offer you an EMI facility. This splits the bill, and you buy the product comfortably because you only have to pay a small amount every month.
Usually, in ordinary EMI, the bank states the interest rate upfront. You have to pay the interest for the EMI facility.
But as you know, we Indians think a lot about interest payments. So they launched a No-cost/ Zero-cost EMI. In a No-cost EMI, you won’t be paying any interest to the bank (directly).
Are you thinking about how does bank and the seller make money?
Let’s say you buy a product of around ₹30k on a 6-month no-cost EMI.
Initially, you will think you have to pay only ₹5k per month. But the bank says you have to pay a processing fee for the EMI facility.
Because EMI is a loan. The bank processes all your details, including your pan card and CIBIL score, and then provides you with the loan (EMI).
Also, you will have to pay 18% GST on the processing fee. And then, you have to pay GST on the interest component of the ₹5k every month.
You won’t be knowing about this. But the bank divides the ₹5k instalment into principal and interest amounts in their books. And every month, you have to pay the GST on the interest part.
While all this takes place, in the back end, the bank pays the seller the product amount upfront. To increase sales and collaborate with the banks, the seller offers a special discount to the bank to offer the No-cost EMI.
If the product price is ₹30k, the bank just has to pay ₹27k to the seller. So the bank gets a discount of ₹3k or 10%.
So the bank collects a processing fee, interest and a discount. While the seller increases his sales by offering a discount to the bank.
And here you are buying a product you initially thought you couldn’t afford. You are paying the product’s full price, processing fee, and GST on the processing fee and interest. It’s not a no-cost or zero-cost EMI anymore, is it?
Depending on the loan amount, duration, interest rate and processing fee, you might pay an interest of about 9 to 34%. You can check the interest you are paying using this calculator.
Should you purchase on a No-cost EMI?
It wouldn’t be a strict no. Because it depends on what are you purchasing. Do you really need it now? Is the interest rate low? Can you afford it? Are you sure you won’t miss an EMI?
Because an EMI is a loan, it will affect your credit score. If you repay them on time, your credit score will improve. If you don’t, you might be in trouble. Also, is the interest rate worth the product? Think carefully and then decide.
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