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Is No Cost EMI Really No Cost? Find Out How It Works
Most probably you have heard about the "No-Cost EMI"? And you thought of you don't have to pay the entire amount up once with no cost EMI; instead, you may pay small sums over the following few months. No Cost EMI is considered to signify that there is no interest associated.
Sometimes even it might make you feel odd when we see the phrase "No-Cost EMI"? Is something like this really possible? Why would someone distribute fee money in the market like this? Questions like these are rare to find and answers are even hard. There is no such thing as "No-cost EMI" You need to understand, how No-Cost EMI works and whether you should invest in it or not.
No-cost EMI is an offer when you pay for a product in installments without any interest cost. Such schemes aim to simply allure into buying more products by getting into the trap of such incentives. The main objective of the scheme is to make you spend more!
How No-Cost EMI Works?
Here is how the No Cost EMI works, actually:
Suppose a consumer wishes to buy an iPhone for Rs 80,0000
If the client picks a three-month no-cost EMI plan with a 10% interest rate, the buyer would be required to pay Rs 10,000 in interest. The item will now be available for Rs 70,000 if the client decides to pay the entire amount upfront.
However, if they pick no-cost EMI, they must pay the whole amount, which is Rs 80,000. The interest is paid to the financing bank that Rs 10,000 in this situation and the remainder that is 80,000 is paid to the retailer/store.
To understand this you have to make some calculation. Doing some easy calculations will make you understand What you paid? What you will pay? Who you will pay? and how much you saved actually or not?
The Calculation
Let's make it more simple to understand with a table:
Continuing the same case study here
| Particular | Amount |
|---|---|
| Cost of the iPhone | Rs 80,000 |
| Discount Offered | (Rs 10,000) |
| Cost post discount | Rs 70,000 |
| Total Interest to be paid under EMI (if the Purchas is on EMI) | Rs 10,000 |
| Total Amount paid by you | Rs 80,000 |
If you would've done an upfront payment, you would've paid Rs 70,000 but companies actually add-on their interest component and make it seem like there is no interest and no discount.
RBI Circular
No-COst EMI practice by NBFCs or the banks has not been in use since 2013 as the RBI stopped this practice in the same year.
On September 17, 2013, RBI released a circular, which states that "the interest element is often camouflaged and passed on to the customer in the form of the processing fee," banning all no-Cost EMI schemes.
