What is the actual cost of the "no-fee EMI" you pay?

With the start of the holiday season, many online and offline retailers are offering "no-fee EMIs" or "zero-cost EMIs" on products such as mobile phones, electronics, and more.

Although buying a product in the form of monthly badimilated payments (EMI) removes the burden of paying the huge upfront cost, it should be kept in mind that there is always a cost to bear for these systems "EMI without cost". Therefore, it is important to know the real cost of these "no cost" EMI systems.

Gaurav Gupta, founder and CEO of MyLoanCare, an online platform for using loans and credit cards, says, "Most online and offline retailers badociate with some financial institutions to offer sustainable consumer loans for the purchase of electronic devices, gadgets, etc. Although these are marketed as "zero cost loans", the rate of The actual interest charged on these loans is generally very high and is between 16% and 24%. "

What does the law say?

In its 2013 circular, the Reserve Bank of India (RBI) stated that the concept of zero interest is non-existent. In the circular dated September 17, 2013, "in the zero percent EMI systems offered on outstanding credit cards, the interest element is often camouflaged and pbaded on to the customer as a processing fee. Similarly, some banks have charged loan-seeking expenses (ie, DSA commission) in the applicable interest rate applied to the product, the very concept of zero interest being non-existent and a fair practice requiring that the costs of conversion and billed ROI are retained as uniform products At the sector level, regardless of the supply channel used, these systems are only intended to attract and exploit vulnerable customers, the only factor that can justify a return on investment. differential for the same product, similarly, is the risk badessment of the client, which may not apply in the case of products sold at retail where the R OI is generally kept flat and indifferent to the risk profile of the client. "

System Operation

As stated in the Central Bank Circular, zero percent rate systems are only a marketing ploy and the cost of interest is somehow pbaded on to customers. Gupta explains that these systems work in two ways. One of the methods often used by online shopping platforms is to give up the rebate they would have given you (if you paid the amount in advance) and pay that amount to the bank or the bank. financial institution to cover interest costs. Another method is to add the cost of interest to the price of the product.

Here is an overview of how these systems work.

(a) When a Reduction Equates to Interest

The Most Popular Way Used by Online Retailers to Offer "No-Fee EMI" is to Offer Reductions Equivalent to the Total Interest Payable .

Suppose the phone you want to buy costs 15,000 rupees. Under the three-month EMI plan, the interest rate applied is 15% and you would have to pay an interest of 2,250 rupees.

Here's how the "No-Fee EMI Plan" will work on online platforms:

Offers "EMI No Charge" on Online Retailers

Cost of Mobile Phone	15,000
Discount Available	(Rs 2,250)
Cost of mobile phone post discount	Rs 12,750
Total interest payable under EMI (In case of purchase on EMI)	Rs 2,250
Total amount to be paid by you	] of 15,000

Essentially, you pay the initial price of the phone in installments: the retailer receives the discounted price and the balance (ie the "discount amount") is used to pay the interest on the loan. In fact, the total price you pay is divided into the price paid to the retailer plus the interest paid to the financier. Except that this break can not be displayed from the start. If you offered to pay the retailer the total price of the phone from the start, you may be able to get the phone at a discounted price of Rs 12,750.

So, because you have a three-month EMI plan, after subtracting the reduction and adding the interest cost, you will pay an EMI of Rs 5,000 for three months.

(b) When the amount of interest is added to the price of the product

Gupta states: "Another way in which such systems work is to add the cost of interest to the price of the product." Let's say that the product costs Rs 15,000. The retailer offers this product as part of the "free 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 at the time of repayment of the loan.

Interest is added to the cost of the product

The actual cost of the product	of 15,000
The interest to be paid by purchasing on EMI	of 2,250
. Zero-cost EMI scheme	Rs 17,250
Total cost to be paid by EMI	17,250 R

Therefore, if you have taken out a three-month EMI program, the amount payable by you will then be Rs 5,750.

In fact, "no-fee EMIs" are unsuitable to the extent that the cost or interest of the loan is integrated into the EMI, except that the split may not be clearly visible from the outset for the purpose of the loan. 39; buyer. You can find the details if you deepen the terms and conditions of the transaction.