The Truth about No Cost EMIs

Open up any e-commerce website and you’ll be bombarded with No Cost EMI offers. On the surface it seems like the merchants and the banks have tied up to help you buy your favourite products on installments, without paying interests. But this is far from the truth. They will trick you into believing you are buying the product at 0% interest but you'll end paying more than the original price. Just as there's no such thing as a free lunch, similarly there is no such thing as a No Cost EMI. It’s all just predatory marketing. Let me explain with an example.

First off let me tell you, according to RBI's regulations a lender cannot lend money on 0% interest. So banks use different tactics to make it seem like the effective interest rate is 0%.

Now let's assume you want to buy a product worth ₹3599. If you bought it using regular EMIs, the bank will charge you ₹133 as interest. So the effective price would be ₹3732. Now if you opt for the No Cost EMI scheme, the merchant will deduct this interest amount from the product's price. So when you purchase the thing, the price will be ₹3466. The argument is that, the bank will still charge you ₹133 as interest and ultimately you'll be paying the original price of the product i.e. ₹3599.

But this is not the full story. The example I gave you, was a real scenario. I bought a product worth ₹3599 on No Cost EMI. And when I got the EMI statement from my bank I saw that they were charging ₹141 as interest. But I got a discount of ₹133. So immediately I'm at a loss of ₹8. I called the bank to find out why. But they just pointed fingers at the merchant and refused to give any explanation. After I dug deeper I found out that the extra charge is because of how the billing cycle works. See, I bought the product on 29th July and the bill for my credit card was generated on 16th August. The bill was due for 5th September. Now the bank assumes that I will not pay the bill before 5th September. Hence difference between the purchase date and the payment date of the first EMI is more than 30 days. This gives the bank the opportunity to charge more interest. ₹8 more to be exact. But that is not all. You'll also have to pay 18% GST on the interest portion of your EMIs. So I had to shell out ₹25 more. Taking all that into account, in the end I ended up paying ₹3466 + ₹141 + ₹25 = ₹3632, which is ₹33 more than the original amount. Now don't get swayed by this small difference. The costlier the product, the more you'll pay in interest charges and GST.

The worst part is that neither the merchant nor the bank provided helpful information. They just pointed fingers in each other and played the blame game. And the customer care professionals were as robotic and dumb as you'd expect. Nowhere on their websites did they mention these hidden costs. This shady practice should stop immediately.

So this festive season beware while you make those purchase decisions. Instead of buying things on EMIs and incur hidden charges, take a few months to accumulate the money and then buy the product. If something seems too good to be true, then perhaps it is.