What is no-cost EMI?
No-cost EMI is a type of easy EMI in which you pay nothing over the agreed purchase price. The purchase price is divided by the length of the tenure to calculate the EMIs. Some financiers offer the applicable interest as a discount upfront; others may offer a deal that includes certain discounts and processing charges. No-cost EMI is sometimes called zero-cost EMI financing.
How does no-cost EMI differ from a regular EMI?
The major difference is that when you pay for a product through regular EMIs, your EMI amount includes the interest and the processing fees. When you choose no-cost EMI, you convert the price of your product into interest-free EMIs.
Simply put, regular EMI = amount + interest, whereas no-cost EMI = only the amount.
How does no-cost EMI work?
Even when you don't pay the interest, which is instead paid by the merchant or manufacturer, you would still pay two costs. One is GST, mostly levied at 18% every month on the interest, which keeps getting added to your monthly bill until the tenure is complete. The other is a processing fee, which most banks charge at between ₹118 and ₹236.
For example, when you buy a product on no-cost EMI, the merchant bears the annualised interest. Say you are buying a refrigerator worth ₹52,990. Under a 12-month EMI plan at an interest rate of 18%, your interest will come to ₹685. Since you use the ICICI Amazon Pay card, you are also eligible for a 5% cashback on the purchase.
| Cost | Amount |
|---|---|
| Processing fee | ₹236 |
| GST on interest | ₹685 |
| 5% cashback | ₹2,650 |
| Effective loss | ₹3,571 |
Considering the effective loss as the interest you paid for buying the product on no-cost EMI, these are the interest rates for different EMI tenures:
| EMI tenure | Effective interest rate |
|---|---|
| 12 months | 13.1% |
| 9 months | 16.3% |
| 6 months | 22.2% |
| 3 months | 36.7% |
However, not all no-cost EMIs are no-cost. In some cases, you may be eligible for additional offers by making a lump-sum payment instead. Bear in mind that you will still pay 18% GST on the interest to the bank.
The bank will continue to charge interest on the EMI at its existing rates, but that interest is passed on to you as an upfront discount at the time of purchase, effectively giving you the benefit of a no-cost EMI. For example, if you buy a ₹18,000 item on a 6-month tenure, you pay the provider ₹3,000 every month for 6 months. Since 0% EMIs are restricted by the RBI, banks charge interest on the EMI; to make it no-cost, you get the interest payable as an upfront discount on the product.
| Item | Amount |
|---|---|
| Product cost | ₹18,000 |
| Interest | ₹2,000 |
| Upfront discount | –₹2,000 |
| Effective cost | ₹18,000 |
Benefits of a no-cost EMI offer
- You can buy expensive things without paying upfront.
- You pay conveniently over a few months.
- You can choose the tenure that suits your monthly budget.
- Paying the same amount in instalments helps you plan your budget better.