How does No Cost EMI work?

Buying a dream phone may be an impossible dream for many if you had to pay the whole price upfront. Banks used to offer consumers the opportunity to take out a loan and pay the principal and interest together in equated monthly installments or EMI.

Banks later started offering loans for purchases without any interest, calling it no cost EMI. Big purchases are more tempting now, now that you seemingly don’t have to pay interest.

Let’s try and understand how this works.

What is No Cost EMI?

A loan that you borrow for a large purchase typically has an interest component that is charged separately. A no-cost EMI is an offer by companies for their products where you continue to pay equal monthly installments until the end of the tenor, but with no interest.

What it means is that you will only be paying the total cost of the product, with no extra payments.

How are banks able to offer No Cost EMI?

There are two ways in which no-cost EMIs work

Let’s look at them both.

• The first one is to do away with the discount they would have typically offered you, if you chose to pay upfront. When they charge you the full price, the discount they would have offered you goes towards the payment of interest to a bank.
• The second way is that they ‘bake in’ the cost of the interest into the price of the product.

Most online shopping platforms usually pad up offer price and the interest cost in some way is passed on to the customers.

Let’s look at an example.

Assume that you’re in the market for a new phone that costs INR 30,000. You find an offer for a zero-cost EMI for 3 months.

Then the interest component works out to INR 4,500.

In the first scenario, the discount is taken away.

In the second scenario, the interest is inbuilt into the price of the phone.

Now that we have understood that no cost EMIs are not really no cost, let us look at their pros and cons.

Pros of No Cost EMI

• Builds a healthy credit score if you are prompt with payments.
• Allows you to make expensive purchases without paying in one go.
• No interest is charged on the advertised price of the product.
• Helps you plan your budget when you split the costs over a few months.

Cons of No Cost EMI

• Missing a payment or a delayed payment will negatively affect your credit score.
• You will be paying a little more than if you paid the full price upfront.
• Processing fee is usually levied on the products.
• A credit card may be needed to make the purchase.