Money
No Cost EMI Decoded: Know how no-cost EMIs work and why only for 3, 6 or 9 months
The answer lies in an upfront discount by the seller, said SEBI Registered Investment Adviser (RIA) Deepesh Raghaw on his Twitter handle. Raghaw said that when a customer opts for a no-cost EMI and makes the payment from a credit card – two things happen to enable that transaction. First, the merchant gives an invisible discount as per the tenure of the loan and the credit card facilitates a loan for the discounted amount at certain interest rates that adds up exactly to the total price of the good, said Raghaw.
Say, if an item was priced at Rs 30,000 and the customer opts for 6-month EMIs, he will be required to pay Rs 5000 per month. The customer gets the product and pays it back in six installments. For him, there is no fluctuation in price. But what happens in the background is not known to him.
Now, coming to the tenure, why only 3, 6 or 9 months? Deepesh Raghaw says, the longer will be the tenure, the higher will be the interest on the amount and thus the seller will have to bear more discount. So, the seller first sets aside the maximum discount he/she can bear on a particular product and then banks decide their interest rate to bring the final calculation in sync with the price at which a buyer gets the product.
“The discount to provide you with the experience of No-cost EMI increases as you increase the loan tenure. The merchant can bear only so much discount. This automatically limits the loan tenure. Now you know why the tenures of No-cost EMIs are usually 3 to 9 months. Usually 3 and 6 months,” said Raghaw.
He said that while the scheme is called a no-cost EMI, it’s not actually a zero-charge offer. “There is GST on interest charged every month. In this example, you paid Rs 30,229 to close the loan. GST of Rs 229. Increases cost from 0% to 2.6% p.a. Hence, you pay slightly more than the purchase amount. Hence, not really a No-cost EMI,” he said.