By Dishita Jain
What is no cost EMI?
No cost EMI is a type of easy EMI in which one has to pay nothing over the agreed purchase price. The purchase price is then divided by the length of the tenor to calculate EMIs. Some financiers offer the interest component applicable as a discount upfront. Others may offer a deal inclusive of certain discounts and processing charges. No cost EMIs is sometimes referred to as zero cost EMI financing.
How does zero cost EMI differ from a regular EMI scheme?
The major difference is when you choose to pay for a product through regular EMIs, your EMI amount consists of the interest component and the processing fees. And when you choose no cost EMI, you can convert the price of your product into interest-free EMIs.
Simply put, regular EMI = Amount + Interest whereas No cost EMI = Only the amount.
How No Cost EMI Works?
Even if one is not paying the interest cost which is instead paid by merchant/manufacturers, a customer would still be required to pay 2 costs, one is the GST mostly levied @18% every month on the interest cost, and keeps getting added to monthly bill until the tenure gets completed. Most banks charge a processing fee that ranges between ₹118 to ₹236. For example, when you buy a product on no-cost EMI, the merchant bears the annualized interest rate. Suppose 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 eligible to get a 5% cashback on the purchase.
Processing fee: ₹236
GST on Interest: ₹685
5% Cashback: ₹2650
Effective Loss: ₹3571
Considering Effective Loss is the interest you paid for buying the product on No Cost EMI. Following are the interest rates calculated for different EMI Tenures.
12 Month EMI: 13.1%
9 Month EMI:16.3%
6 Month EMI :22.2%
3 Month EMI:36.7%
However, not all no-cost EMIs are no-cost. In other cases, you may be eligible for additional offers by making a lump sum payment. Bear in mind; that you will still need to pay 18% GST on the interest to the bank. The bank will continue to charge interest on EMI as per existing rates. However, the interest to be charged by the bank will be passed on to you as an upfront discount at the time of your purchase, effectively giving you the benefit of a No Cost EMI. For example, if you buy a ₹18000 item at a 6-month tenure you will pay the provider ₹3000 every month for 6 months. Since 0% EMIs are restricted by the RBI, banks levy interest on the EMI. To make it a non-cost EMI you get the interest payable as an upfront discount on the product.
Product Cost: 18000
Interest: 2000
Upfront Discount: -2000
Effective Cost will be 18000
Benefits of No Cost EMI Offer
1. Ability to buy expensive utilities without having to pay upfront
2. Pay conveniently over a few months
3. Flexibility to choose the tenure according to your budget every month
4. The ability to pay the same amount in installments helps in better budget planning
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