Synopsis: “No cost EMI” is a digital credit option allowing the consumers to purchase consumer durables in EMI’s. Available to both credit card users and non-credit card users, the article explores the concept of “no cost EMI” in detail, focusing on its merits and demerits.
The ecommerce boom of 2015 changed how consumers bought durables. The days where people used to save money for months before buying items like a smartphone or a fridge were a thing of the past!
A rise in the millennial population, a higher dispensable income, knowledge of credit scores, and ecommerce partnerships with banks and NBFC’s led to a significant rise in consumer durable purchases. Where previously a consumer had to wait months to save up Rs. 15,000 for a smartphone, now the same can be availed instantly with a 20% down payment and the rest on EMI’s on credit cards or “buy now, pay later” apps.
This led to a rise in the “no cost EMI” market where products are sold to consumers seemingly without any kind of interest! Let’s explore the reality.
Is No Cost EMI Real?
According to the 17 September, 2013 circular from the Reserve Bank of India (RBI), the concept of zero percent interest is non-existent. We are quoting an extract from the RBI circular, which says:
“In the zero percent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to the 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 or segment, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting the vulnerable customers.
The only factor that can justify the differential RoI for the same product, tenor being the same, is the risk rating of the customer, which may not be applicable in the case of retail products where the RoI is generally kept flat and is indifferent to the customer risk profile.”~ Reserve Bank of India (Source)
Breaking down the above in simple language means:
#1 Zero percent EMI schemes are conceptually non-existent. If a consumer is taking a loan or a credit, in any format, interest is charged.
#2 The no cost EMI schemes do charge interest, but they are camouflaged as the vendor’s processing fees, or the product is discounted to benefit the bank.
#3 A different interest rate is applicable for every consumer based on the current CIBIL score when availing various loan instruments, but when buying consumer durables like electronic items, the consumer’s risk profile is irrelevant as the rate of interest is kept the same.
How does the “No Cost EMI” Scheme Work?
There are two ways in which the “no cost EMI” digital credit works:
#1 Interest amount is added to the product price.
In this, the product is sold on a “zero cost EMI” scheme to the consumer, and the interest is already added to the product cost.
For example, if the product cost is Rs. 10,000 at 18% EMI interest, the product cost becomes Rs. 11,800, including the 18% interest. The cost of the product on the ecommerce site or with the offline retailer becomes Rs. 11,800, which is sold to the consumer at, let’s say, three equal monthly installments of Rs. 3,933.
#2 Product discount is equal to the interest.
In this, the product is discounted, and the discounted amount is equal to the interest paid by the consumer.
For example, if the product cost is Rs. 10,000 and the seller is giving an 18% discount, the product price becomes Rs. 8,200. Now, when the consumer wants to purchase with any of their networked credit cards, an interest of 18% is added to the price of Rs. 10,000, making it Rs. 11,800 (Rs. 10,000 + Rs. 1,800).
Essentially, a discount of 18% doesn’t exist in reality. The consumer is paying the actual product price and interest to the seller/banker.
This method is commonly used in ecommerce marketplaces.
No Cost EMI doesn’t exist.
The term is a misnomer; the interest amount is built into the cost of the product. Even with discounted schemes, the seller and the digital credit providing credit card company or any “buy now, pay later” app is at a profit.
There is nothing “free” in the finance and banking industry. The No Cost EMI scheme is one such example. The fanciful name lulls the curiosity of the consumer into thinking that a product is being purchased without paying any interest but that is simply not the truth!
Being financially aware and knowing how the banking industry works will make any consumer better and informed decision-maker.