For an expensive online purchase, do you pay in full or take the benefit of an EMI scheme?
Depending on the range of credit cards you have and the ongoing offers, you may have the following options during checkout:
- Full upfront payment.
- Full upfront payment with discount.
- Interest-EMI without discount: The EMIs add an interest cost which increases your overall cost. Instead of paying Rs 50,000 upfront, you decide to pay Rs 8,676 for 6 months.
- Interest-based EMI with discount: When you pay on EMIs, you get discount/cashback on EMI purchase.
- No-cost EMI without discount: You get a No-cost EMI where you pay the same amount as an outright purchase. Instead of paying Rs 50,000 upfront, you pay Rs 8,333 for 6 months.
- No-cost EMI with discount: When you take a No-cost EMI scheme, you get discount/cashback on EMI purchase.
Note: For EMI based purchases: You may have to pay a processing fee. In addition, you must also pay GST on the interest cost of the EMI.
How Do EMIs Help?
I must start with a warning that if you are insincere with loans and EMIs, you will soon find yourself in a serious problem. Credit gives you the power to spend money that you do not yet own. This is indeed useful if you use credit responsibly. A common example is buying a house on a home loan. You buy an asset, save on rent, and provide emotional and financial comfort to the family. I would avoid “Buy vs rent” debate here. And yes, I assume that the EMI is affordable.
However, in this post, we are talking about short-term loans for small purchases. By converting the purchase amount into EMIs, you ensure that you spread out the expense over a few months and avoid skipping any investments for a month.
Let us consider an example. You run a tight ship and manage to invest Rs 50,000 per month in mutual funds. In one of the months, you need to buy a laptop worth Rs 50,000. You do not have so much spare cash lying with you.
You have 3 options — 1) Skip mutual fund investments for a month OR 2) Take out money from your existing portfolio. Both options are fine given the situation.
A third option is that you take a loan and spread out the expense over a few months.
Given how we tend to manage our cash flows (i.e., spend less when the cash position is tight), it is possible that we will adjust expenses in the coming months so that we can pay the loan EMIs and also continue the MF investments in the coming months. In a way, despite taking the loan, we have been able to continue the investments.
Hence, to a responsible borrower and investor, these short-term loans can be a useful ally.
How Loan EMIs Pose a Risk?
Credit gives you power. If you do not use the power responsibly, you will soon face problems.
You just keep buying stuff on EMIs, assuming you will somehow manage to pay the EMIs, or things will fall in place. Usually, things do not work in this manner. As a Warren Buffet saying goes, “if you keep buying things you do not need, you will soon need to sell things you need.”
Loans come with an additional cost (except, say, No-cost EMIs). So, you pay Rs 53,000 for a product that would have cost Rs 50,000 if you had paid upfront. Hence, if you are not sincere with credit, it is better to purchase outright and not take a loan.
Which Option Must You Choose?
Let us compare the 6 options with the help of an example.
I have made many assumptions. Rate of interest is 14% p.a. For EMI purchases, I have considered the tenure of 6 months. The difference in total payouts across the 6 options will depend on the loan interest rate, discount/cashback, and the loan tenure.
| Outright Purchase | Outright Purchase with Discount | Interest EMI without Discount | Interest EMI with Discount | No-cost EMI without Discount | No-cost EMI with Discount | |
| Listed Price | 50000 | 50000 | 50000 | 50000 | 50000 | 50000 |
| Discount | 0% | 5% | 0% | 5% | 0% | 5% |
| Purchase price after discount | 50,000 | 47,500 | 50,000 | 47,500 | 50,000 | 47,500 |
| EMI | NA | NA | 8,677 | 8,243 | 8,333 | 7,917 |
| Months | NA | NA | 6 | 6 | 6 | 6 |
| Total Payment | 50,000 | 47,500 | 52,061 | 49,458 | 50,000 | 47,500 |
| *I have not considered processing fee and GST on the interest portion of EMI | ||||||
It is possible that discount rate may vary for outright and EMI purchases. The banks tend to offer higher discounts on EMI purchases compared to outright purchases because the loan interest cost tends to make up for the higher discount. The reverse can also happen. i.e., you may get better benefits on an outright purchase. For instance, if you use Amazon Pay ICICI Credit card, you get 5% cashback on outright purchase but no cashback on EMI purchases.
For EMI purchases, you may have to pay a processing fee as well. Hence, consider those costs too in your assessment. I have not considered any processing fee in my calculations.
Depending on the range of credit cards you have, it is possible all six options are available to you. Everything else being the same: I would prefer to pay less AND pay that amount over a longer period.
So, between paying Rs 50,000 outright and paying Rs 47,500 outright, I would choose the second option. Who wouldn’t?
Between paying Rs 50,000 upfront and paying Rs 50,000 in 6 equal EMIs of Rs 8,333 (total payment of 50,000), I will again choose the second option. Time value of money.
With this premise, Option 6 (No-cost EMI with discount) becomes a compelling deal, at least for you.
You simply have to calculate your payout under various options and choose the one where you pay the least.
However, life is never that simple and decisions are not always objective. Your cashflows are stretched. What would you pick? Rs 50,000 outright OR Rs 8,677 for 6 months (total payout of Rs 52,000). You pay Rs 2,000 more by taking a loan but you have to pay the amount over 6 months.
What Should You Do?
Depends on your preference. Some people simply hate loans. No need for them to think about a loan.
Depends on the offer. If you are getting a better deal on a particular mode of purchase (say better discount or cashback on outright or EMI purchase), then you sign up for that deal.
Depends on your cashflows and financial position. If you have Rs 10 lacs sitting in your bank account earning 3% per annum, it makes little sense to take a loan of Rs 50,000 at 14% p.a. However, even in such cases, no-cost EMI may still make sense if you are not averse to loans.
Alternatively, if your cashflows are tight but can support EMIs without affecting your regular investments and budget, you can consider EMIs even if EMI purchase costs you a bit more.
Depends on how financially responsible you are. If you cannot keep track of your loans or how loans are going to affect your cashflows, you must never take a loan. Always buy outright OR buy when you can make full payment.
How do you prefer to pay for your online purchases?