You buy an digital gadget from Amazon or Flipkart. On the fee web page, you possibly can pay upfront or you possibly can go for No-cost EMI out of your financial institution.
What’s a No-cost EMI?
As a substitute of paying Rs 30,000 upfront, you pay Rs 5,000 per 30 days for the subsequent 6 months. You continue to pay Rs 30,000 however you get to pay the quantity over 6 months (as an alternative of upfront). No price for you. Therefore, the identify No-cost EMI.
What a superb deal, isn’t it?
However have you learnt RBI prohibits banks from providing zero curiosity EMI schemes?
If the banks can’t provide loans at 0% p.c, how do retailers provide such schemes then?
Have you learnt the fascinating math behind the No-cost EMI schemes?
Moreover, you can see No-cost EMIs for less than 3, 6 or 9 months mortgage tenure? Normally 3 or 6 months. Why not for 12, 18 or 24 months?
When you perceive the maths, you’ll have all of the solutions.
Let’s discover out.
Word: I additionally wrote a Twitter thread on how No-cost EMIs. Should you use Twitter, you possibly can take a look at the Twitter thread right here. Should you just like the content material, do like/retweet/share.
How do No-cost EMIs work?
Let’s shortly examine how Amazon and Flipkart clarify this.
Right here is an excerpt from Amazon web site with respect to No-cost EMI schemes.
Amazon
The financial institution will proceed to cost curiosity on EMI as per current charges. Nevertheless, the curiosity to be charged by the financial institution can be handed on to you as an upfront low cost on the time of your buy, successfully supplying you with the good thing about a No Price EMI. This low cost excludes GST on curiosity quantity that can be charged by your financial institution.
Flipkart additionally explains in the same method by means of an instance.
Let’s see what this implies.
- Let’s assume the merchandise prices Rs 30,000.
- Should you go for 6-month No-cost EMI, you’ll have to pay an EMI of Rs 30,000/6 = Rs 5,000 per 30 days
- The financial institution fees rate of interest of 15% p.a. for a 6 month mortgage.
- Now, discover X such {that a} mortgage of X at 15% p.a. for six months ends in an EMI of Rs 5,000 per 30 days. Use PV components in excel to seek out X.
- X = Rs 28,730
- Provide upfront low cost of Rs 30,000 – Rs 28, 730 = Rs 1,270. The service provider bears the low cost.
- Your Bank card is charged Rs X or Rs 28,730. That’s decrease than the listed worth of Rs 30,000.
- Should you work the numbers, a mortgage of Rs 28,730 at 15% p.a. for six months can have an EMI of Rs 5,000 per 30 days.
- A couple of days later, the financial institution will convert buy quantity (X) into EMIs. 5,000 per 30 days for six months.
- You’ll have to pay GST on the curiosity quantity. Now, the GST paid is an additional price to you.
Let’s attempt to perceive with the assistance of one other instance .
The price of the product is Rs 1,01,999.
You may see No-cost EMI choices for 3-month and 6 month EMI. For longer tenure reimbursement, the no-cost EMI possibility is just not accessible. We’ll see later why that’s the case.
The speed of curiosity can’t be zero as a result of that’s not acceptable to the RBI. As you possibly can see, for the opposite EMI schemes, the speed of curiosity is 15% p.a. It’s truthful to imagine R=15% p.a.
For the three months No-cost EMI, you pay Rs 34,000 per 30 days. That makes it 1,02,000. You don’t pay something further. The distinction of Rs 1 is to rounding off.
Ditto for 6-month No-cost EMI. 17,000 X 6 = 1,02,000.
So, if you are going to buy the merchandise for 1,02,000, you’ll have to pay Rs 17,000 per 30 days for six months.
The place is the upfront low cost?
As we have now mentioned earlier than, banks can’t provide any mortgage with out curiosity.
It’s one other matter if you don’t return the principal. 😊 Every thing needs to be proper on paper.
Coming again to the subject, we have to determine the quantity X, that may lead to EMI of Rs 17,000 per 30 days for six months at an rate of interest of 15% p.a.
You may merely use PV operate on excel to seek out that out. It’s also possible to check out Mortgage calculator to determine the identical.
Y = PV(15%/12,6,17000,0,0) = Rs 97,682
Your bank card can be charged Rs 97,682.
Due to this fact, the low cost (D) turns into 1,01,999 – 97, 682 = Rs 4,318
This low cost is borne by the service provider/retailer/model/vendor.
Had you opted for 3 month No-cost EMI, your bank card would have been charged Rs 99,502. The upfront low cost would have been Rs 2,497.
Should you had an possibility of going for 9 month No-cost EMI, the upfront low cost would have been Rs 6,093. For a 12 month No-cost EMI, the upfront low cost can be Rs 7,825.
The upfront goes up with the mortgage tenure.
Let’s think about this with one other instance.
Listed worth (price) =Rs 30,000, Curiosity Price = 15% p.a.
- 3 months No-cost EMI. X = Rs 29,265. Low cost = Rs 735
- 6 months No-cost EMI. X = Rs 28,730. Low cost = Rs 1,270
- 9 months No-cost EMI. X = Rs 28,208. Low cost = Rs 1,792
- 12 months No-cost EMI. X = Rs 27,698. Low cost = Rs 2,302
- 18 months No-cost EMI. X = Rs 26,716. Low cost = Rs 3,284
- 24 months No-cost EMI. X = Rs 25,780. Low cost = Rs 4,220
The low cost to supply you the expertise of No-cost EMI will increase as you enhance the mortgage tenure.
For the reason that low cost is borne by the vendor/retailer/model, the associated fee (low cost quantity) to the service provider goes up if the reimbursement tenure is longer. And the service provider can bear solely a lot low cost.
That’s the reason No-cost EMI schemes are restricted to shorter reimbursement tenures. Normally 3 to six months.
The scheme is No price for you. Nevertheless, it’s not Zero curiosity for the financial institution (which RBI wouldn’t be proud of).
Everybody wins.
The shopper will get the product in simple zero-cost installments.
The financial institution will get the mortgage and avoids regulatory glare. The scheme is No price for you. Nevertheless, it’s not zero rate of interest for the financial institution.
The service provider, regardless of the low cost hit, will get enterprise.
Is the No price EMI scheme actually No-cost?
Not likely. GST performs spoilsport.
GST is charged on the curiosity portion of the EMI.
Let’s see the way it impacts your fee.
As you possibly can see, you’re paying one thing further each month as a consequence of GST on the curiosity price.
Within the first month, you pay Rs 5,065 (as an alternative of Rs 5,000). That is due to 18% GST on curiosity quantity of Rs 359.
359*18% = Rs 65
The overall further fee as a consequence of GST over the mortgage tenure can be Rs 229 i.e. you’ll pay Rs 30,229 (as an alternative of Rs 30,000).
This pushes the price of mortgage from 0% to 2.6% p.a.
In absence of GST, the efficient price of the mortgage would have been 0%.
Due to this fact, probably not a Zero price EMI for you.
Don’t overlook the processing charge
A couple of banks cost a processing charge on EMI transactions, together with No-cost EMI transactions.
Such processing charge could possibly be a % of your buy quantity or a set charge (no matter mortgage quantity).
As an illustration, ICICI and HDFC Financial institution cost Rs 199 + GST.
Your financial institution might have a unique coverage. Please examine together with your financial institution.
Processing charge provides to the price of borrowing. Moreover, a set charge may also sharply enhance the associated fee for smaller loans.
As we have now seen above, No-cost EMIs are brief time period loans. Due to this fact, the affect of processing charge is unfold over a really brief interval.
Let’s return to the instance mentioned (Price =30,000, Rate of interest = 15% p.a., Mortgage Tenure = 6 months).
GST elevated the price of mortgage from 0% to 2.6% p.a.
Processing charge of Rs 199 + GST will increase the associated fee from 2.6% to five.3% p.a.
Now, the affect can be increased for shorter length loans.
If the mortgage tenure is 3 months, the efficient price is 7.3% p.a.
Furthermore, the affect can be increased for smaller loans.
As an illustration, the efficient price of No-cost EMI for Rs 10,000 mortgage (Price =10,000, Rate of interest =15%, Tenure = 6 months, Processing charge = 199 + GST) can be 16.8% p.a. That’s the sort of affect processing charge can have on brief time period loans. That is worse than a 12% mortgage accessible at 0% processing charge.
Word: The processing charge is just not at all times disclosed on the platform (Amazon/Flipkart). The onus is on you to examine with the financial institution.
Don’t ignore Misplaced cashbacks and rewards
ICICI AmazonPay Credit score Card presents 5% cashback to Prime customers (3% to Non-prime customers) on each buy on Amazon. Nevertheless, in case you purchase on EMIs, together with No-cost EMIs, you don’t get any cashback.
The identical occurs in case you purchase on EMIs utilizing Flipkart Axis Financial institution bank card.
Now, these misplaced cashbacks are a possibility price in case you go for no-cost EMIs.
Do think about these prices earlier than buying on No-cost EMIs.
Are No-cost EMI schemes good?
No-cost EMI schemes assist you to buy gadgets on EMIs with none extra price. Or a really small price.
Troublesome to seek out flaws with loans with efficient price of 0% or say lower than 5% p.a.
Whole lot.
Nevertheless, do think about the affect of processing charge and the potential misplaced cashbacks/rewards earlier than you choose.
A caveat: Whereas No-cost EMIs enhance your affordability, each mortgage have to be repaid. No-cost EMIs should not a license to overspend. Don’t overborrow. Overborrowing or reckless credit score behaviour can get you into severe hassle.
Picture Credit score: Pixabay.com
The publish was first revealed in August 2018 and has been up to date since.
