No Cost EMIs
A regular EMI option typically entails a monthly installment of the product cost plus principle and interest. Whereas, No-cost EMIs are financing options that allow you to pay for a purchase over time and interest-free. While this may appear to be appealing on the surface, there is a cost. In most cases, this expense is incurred by foregoing a discount on the goods or services in question. Further, Let us go through this article to get a better idea of what this option gives to a customer and whether it is truly a profitable deal for the customer -
What is No Cost EMI ?
A no-cost EMI is a deal that allows you to pay for a product or service in manageable monthly installments while paying no interest. This implies you are only paying the product's complete price, with no additional fees. For example, if Ms. Sneha buys a TV costing Rs.18000 on a 3-month no-cost EMI, she will have to pay Rs. 6000 to her EMI provider every month for three months, for a total of Rs 18000 at the end of the three months with no interest on it.
What does the law say?
In 2013, the Reserve Bank of India (RBI) issued a circular stating that zero percent interest or no-cost EMI is non-existent, i.e., the interest payment is integrated into the product's price in no-cost EMI plans. The interest element is often hidden and passed on to the client in the shape of a processing fee in zero percent EMI schemes given on credit card outstanding. Similarly, some banks included the costs of obtaining the loan in the product's applicable rate of interest (RoI). Since there is no such thing as zero percent interest, fair practice dictates that the processing fee and return on investment (ROI) charged be kept consistent across all products and segments.
What is the process to avail No-cost EMIs?
Individuals can receive a no-cost EMI when purchasing online for expensive devices, furnishings, appliances, and lifestyle items, among other things. This financing arrangement, however, is only applicable to gadgets, appliances, and furniture.Let us now have a glance at its online & offline processes -
Online process - Online process is usually followed by the e-retailers. The steps for the same are given below -
1. Choose the item they want to purchase.
2. They'll need to see whether there are any no-cost EMI choices for that particular product.
3. If an EMI option is available for the purchase of the product, the customer must consider all of the payment choices.
4. On the payment page, they must select the EMI option that they believe will best suit their financial situation.
5. They must then enter their credit card information, which includes the card number, name on the card, expiration date, and CVV number.
6. The principle amount will be blocked on their credit card once they complete the checkout process.
7. On their registered email address, they will receive a detailed explanation of the payment details.
Offline process - Offline process is usually followed by megastores, malls & etc. The steps for the same as follows -
1. They will be able to take the product home once the paperwork is completed.
2. Along with the form, they will need to send copies of one evidence of identification and one proof of address.
3. They must next fill out a form with information such as their name, phone number, address, the EMI option they choose to use, and their signature.
4. Three, six, nine, and twelve-month EMI options are available in stores.
5. The consumer must select the EMI option after they have decided on the items they want to purchase.
Moreover, the steps for both online & offline process remain as the ones listed above. However, there can be some differences depending upon store or the institution offering the scheme.
How does it Work?
As said above, Zero percent interest schemes are essentially a marketing ploy, according to the central bank's circular, and the interest expense is passed on to customers in some way. Usually, works in two different ways. One such method is online shopping platforms frequently employ is to forego the discount that they would have offered you (if you had paid the full amount upfront) and instead pay this amount to the bank or financial institution to offset the interest costs. Another option is to include the interest cost in the product's pricing. Here's how these schemes work in reality -
a) When a discount is equivalent to interest - The most common technique for online retailers to provide "No-cost EMI" is to offer discounts equal to the total amount of interest to be paid. Exactly how we saw in the case of Ms. Sneha. In the above example, Ms. Sneha bought a TV costing Rs. 18,000. lets say suppose ,after the discount the TV was offered at Rs. 15250 (So here, the discount offered is Rs. 18000- Rs. 15250 = Rs. 2750). But when a customer avails a no-cost EMI , the TV will be available at Rs. 18000. In essence, you pay the TV's original price in installments: the store receives the discounted price, and the remainder (i.e., the 'discount amount') is used to pay the loan's interest. In reality, the entire price you pay is split between the amount you pay the store and the amount you pay the lender in interest. Except that this breakup might not be revealed right away. You might be able to get the TV at a discounted price of Rs 15,250 if you offer to pay the merchant the entire price of the TV up front.
b) When the interest amount is already included into the product cost - Another way such schemes function is to include the interest cost in the product's price. Let's say the phone costs Rs 18,000 in total. This product is available for Rs 20,250 under the retailer's 'No-cost EMI' plan. The interest of Rs 2,250 has already been factored into the price of your purchase, and you will be responsible for paying it as you repay the loan.
Lastly to summarize, If you go deeper into the deal's terms and conditions, you might uncover the answers & find out an option which suits best as per your needs.
- TEAM IFA