Are no-cost EMIs worth it? Important considerations before opting for one | Personal Finance
Free monthly installments are popular with consumers who want to make large purchases without upfront payments or interest. Are they really as beneficial as they seem?
What is a no-cost EMI
It is a payment option that allows you to make purchases and repay them in installments without incurring additional interest.
Suppose you want to buy a television worth Rs 1,00,000 and opt for an interest-free installment plan for 12 months. Without interest-free installment, the interest rate will be 12 percent.
Breakdown of No-cost EMI
Product Price: Rs 1,00,000
Free EMI Tenure: 12 months
Rs 12,000 interest
Total cost without free EMI: Rs 1,12,000
How it works
With a no-cost EMI plan, ideally you pay the same amount every month for the entire tenure of the plan, with no additional interest charges.
Monthly installment: Rs 1,00,000 ÷ 12 = Rs 8,333.33
So over a 12 month period you would pay:
Total repayment with no cost EMI option: Rs 8,333.33 × 12 = Rs 1,00,000
This means you will pay exactly Rs 1,00,000 for the TV, with no additional charges or interest.
You’ll pay the exact price of the TV spread over 12 months. However, it’s important to note that while interest isn’t charged directly, other fees or adjustments may be factored into the total cost calculation.
“No-cost EMI is a financing option that lets you pay for a product in monthly installments (EMIs) without paying any additional interest. This payment scheme is designed to make purchases more affordable by spreading the cost over a period of time, which is usually between 3 to 12 months and even 24 months for some products. Opting for a no-cost EMI can be beneficial if you want to manage your cash flow without paying extra. It is particularly attractive for expensive items like electronics or home appliances,” said Adhil Shetty, CEO, Bankbazaar.
Things to consider when considering a no-cost EMI
Participation requirements: The requirements for the free EMI may be creditworthiness thresholds or certain card types.
Product price comparison: Compare the EMI price with the regular cash price to ensure you are not overpaying.
Term options: Check the different terms available and choose the one that fits your budget.
Prepayment penalties: Some no-cost EMI plans may impose penalty charges on early repayment. If you expect to have the funds to repay the EMI early, check the terms and conditions to avoid unexpected charges
Processing fees: Be aware of upfront or hidden processing fees.
Impact on credit score: Regular, on-time payments can positively impact your credit score, while missed payments can harm it.
Terms and conditions: Read all the terms and conditions carefully before agreeing to the EMI plan.
First published: August 27, 2024 | 11:27 am IS
