Did you recently purchase a product on the No-cost EMI? Are you planning to avail moratorium on such a loan? If the answers to both the questions is YES, how will the moratorium affect the No-cost EMI structure? Will this still be a No-cost EMI? Let’s find out.
How Do the No-Cost EMIs Work?
- You get an upfront discount on the listed price of the product.
- The bank provides you the loan for the discounted price at a certain rate of interest (It is not a zero-interest rate loan). The interest rate and the loan tenure impact the discount. Longer the tenure, higher the discount. Higher the interest rate, higher the discount.
- The discount is such that, the total of all the EMIs is equal to the listed price of the product.
To find out more about math behind the No-cost EMIs, refer to this post.
Let us consider an example. You are buying a mobile phone from an online retailer for Rs 12,999. If you opt for 6 month No-cost EMI, an upfront discount of Rs 479 shall be given and your credit card will be billed Rs 12,520. Subsequently, this expense will be converted into a loan for 6 months at 13% p.a. (Had the interest rate been 15%, the discount would have been Rs 550 and the loan will be given for Rs 12,449.)
By using the loan calculator, you can find the EMI for such a loan (12,520, 13%, 6 months) will be Rs 2,167. And Rs 2,167 x 6 = 12,999 (minor variation due to rounding off). From your perspective, you don’t have to pay anything extra and you get the convenience of easy payment. By the way, you do pay a little extra because of the GST on the interest component of the EMI but that’s not much.
Here is an example.
| Cost of the item | ₹ 12,999 | ||||||
| No Cost EMI Tenure (months) | 6 | ||||||
| Interest Rate (Assumed) | 13% | ||||||
| No Cost EMI (Cost/No. of EMIs) | ₹ 2,167 | ||||||
| Net Loan (Amount charged to your credit card) | ₹ 12,520 | ||||||
| Upfront Discount to you | ₹ 479 | ||||||
| Loan Schedule | |||||||
| Month | O/S at the start of the month | EMI | Interest | Loan repaid during the month | O/S at the end of the month | GST | Total Monthly outgo |
| 1 | 12,520 | 2,167 | 136 | 2,031 | 10,489 | 24 | 2,191 |
| 2 | 10,489 | 2,167 | 114 | 2,053 | 8,436 | 20 | 2,187 |
| 3 | 8,436 | 2,167 | 91 | 2,075 | 6,361 | 16 | 2,183 |
| 4 | 6,361 | 2,167 | 69 | 2,098 | 4,264 | 12 | 2,179 |
| 5 | 4,264 | 2,167 | 46 | 2,120 | 2,143 | 8 | 2,175 |
| 6 | 2,143 | 2,167 | 23 | 2,143 | 0 | 4 | 2,171 |
How Moratorium Makes It a Costly Loan?
As a buyer, you must understand your loan is NOT a zero-interest loan. The banks can’t do that. It is the upfront discount (when you opt for No-cost EMI) that gives you the No-cost experience. Now, if you avail EMI moratorium, the interest will continue to accrue. Why? Because the interest rate for your loan is not 0%. The interest rate is 13% (in the above illustration). It will continue to get charged.
Let’s see how things will change. Continuing with the above example, let’s say you choose not to pay the EMI for such loan for 3 months. While your bank may not charge any penalty or report your non-payment to the credit bureaus, your loan will still accrue interest. Rs 12,520 loan at 13% p.a. will grow to Rs 12,931 over 3 months.
(18% GST is applicable on the interest component. Had I considered the GST (to be added back to the principal), the outstanding principal at the end of 3 months would have been Rs 13,006. However, I am not sure about the applicability of GST in this case. Therefore, I will ignore the impact of GST on accrued interest in the analysis.)
Now, by the time you start paying EMIs, the principal amount has gone up. Here is the revised schedule.
| Month | O/S at the start of the month | EMI | Interest | Loan repaid during the month | O/S at the end of the month | GST | Total Monthly outgo |
| 1 | 12,931 | 2,238 | 140 | 2,098 | 10,834 | 25 | 2,263 |
| 2 | 10,834 | 2,238 | 117 | 2,120 | 8,713 | 21 | 2,259 |
| 3 | 8,713 | 2,238 | 94 | 2,143 | 6,570 | 17 | 2,255 |
| 4 | 6,570 | 2,238 | 71 | 2,166 | 4,404 | 13 | 2,250 |
| 5 | 4,404 | 2,238 | 48 | 2,190 | 2,214 | 9 | 2,246 |
| 6 | 2,214 | 2,238 | 24 | 2,214 | 0 | 4 | 2,242 |
You can see that the EMI has gone up from Rs 2,167 to Rs 2,238. Therefore, over the course of the loan, you will pay Rs 2,238 x 6 = Rs 13,426. If you include the GST impact (as shown in the above table), the total payment will be Rs 13,515. Now, it is clearly not a No-cost EMI.
I have already discussed whether you should avail EMI moratorium. While the spreadsheet analysis will answer this question in the negative, there is no black or white answer. Everything depends on your circumstances. I trust your judgement.