With the start of the festival season, many online and offline retailers are offering ‘No-cost EMI’ or ‘Zero Cost EMI’ on products like mobile phones, electronic appliances, and so on.
While buying a product on equated monthly instalments (EMI) takes away the burden of paying the huge cost upfront, one should remember that there is always a cost that one has to bear on these ‘no-cost EMI’ schemes. Therefore, it is important to know the actual cost of such ‘no-cost EMI’/’zero-cost EMI’ schemes.
Gaurav Gupta, Founder & CEO, MyLoanCare, an online platform for availing loans and credit cards, says, “Most offline and online retailers tie up with certain financial institutions offering consumer durable loans to buy electronic appliances, gadgets and so on. While these are marketed as ‘zero cost loans’, the actual interest rate charged on such loans is usually very high ranging between 16 per cent and 24 per cent. ”
What does the law say?
The Reserve Bank of India (RBI) in its circular in 2013, has said that the concept of zero per cent interest is non-existent. The circular dated September 17, 2013 says, “In the zero percent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to customer in the form of processing fee. Similarly, some banks were loading the expenses incurred in sourcing the loan (viz DSA commission) in the applicable rate of interest (RoI) charged on the product. Since the very concept of zero percent interest is non-existent and fair practice demands that the processing charge and RoI charged should be kept uniform product/segment wise, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting the vulnerable customers. The only factor that can justify differential RoI for the same product, tenor being the same, is the risk rating of the customer, which may not be applicable in case of retail products where the RoI is generally kept flat and is indifferent to the customer risk profile.”
How does the scheme work?
As said in the central bank’s circular, zero per cent interest schemes are just a marketing gimmick and the interest cost in some way is passed on to the customers. There are two ways in which these schemes work, explains Gupta. One of the ways often used by online shopping platforms is to forego the discount that they would have offered to you (if you have paid the amount upfront) and instead pay this amount to the bank or financial institution to cover the interest cost. Another way is by adding the interest cost in the price of the product.
Here’s a look at how these schemes work.
a) When a discount is equivalent to interest
The most popular way through which online e-tailers offer ‘No-cost EMI’ is by offering discounts equivalent to the total amount of interest to be paid.
Suppose the phone you want to buy costs Rs 15,000. Under the three-month EMI plan, the interest rate charged is 15 per cent and you would have to pay an interest amount of Rs 2,250.
Here’s how the ‘No-cost EMI plan’ on the online platforms will work:
‘No-cost EMI’ offers on the online retailers
|Cost of Mobile Phone||Rs 15,000|
|Discount offered||(Rs 2,250)|
|Cost of Mobile phone post discount||Rs 12,750|
|Total interest to be paid under EMI (In case of purchase on EMI)||Rs 2,250|
|Total amount to be paid by you||Rs 15,000|
Essentially, you pay the original price of the phone in instalments: the retailer gets the discounted price and the balance (i.e., the ‘discount amount’) goes to pay the interest on the loan. Actually, the total price you pay gets divided into price paid to retailer plus interest paid to financier. Except that this break up may not be shown upfront. If you were to offer to pay the retailer the full price of the phone upfront, you may be able to get the phone at a discounted price of Rs 12,750.
Thus, as you have taken a three month EMI plan, after subtracting the discount and adding interest cost, you will be paying an EMI of Rs 5,000 for three months.
b) When the interest amount is added to the product price
Gupta says, “Another way in which such schemes work is by adding the interest cost to the price of the product.” Let us say the product costs Rs 15,000. The retailer offers you this product under the ‘No-cost EMI’ plan for Rs 17, 250. Here the interest of Rs 2,250 is already added to the cost of your product and will be paid by you as you repay the loan.
Interest is added to product cost
|Actual Cost of the product||Rs 15,000|
|Interest to be paid while buying on EMI||Rs 2,250|
|Offer Price under Zero Cost EMI Scheme||Rs 17,250|
|Total Cost to be paid by you via EMI||Rs 17,250|
Therefore, if you have taken a three month EMI plan, then the amount payable by you will be Rs 5,750.
Actually, ‘No cost EMIs’ is a misnomer because cost or interest on the loan is built into the EMI except that the break up may not be clearly visible to the buyer upfront. You may find the details if you look deeper into the terms and conditions of the deal.