EMI Option – Boon or Bane

Do you know the story of Bhasmasura? In Hindu mythology Bhasmasura was a demon who got a boon from Lord Shiva that anyone he touches with his right hand should turn into ashes. Once he got this boon, Bhasmasura wanted to try it on Lord Shiva himself. On seeing the plight of Shiva, Lord Vishnu came in the form of a beautiful woman called Mohini, seduced him and tricked him to put his right hand on his own head!

You may wonder what this story has to do with EMIs? I told you this story just to show you how sometimes a special power or privilege turns out into a burden and finally causes downfall of the person who utilizes it.

It is common for people to opt for home loans that are paid off through equated monthly installments (EMI). The option to pay for an item through easy (?) installments have changed our spending habits. It has enabled us to purchase what we cannot afford in the immediate present and converted our ‘wants’ into ‘needs’.

Paying through monthly installments instead of one time lump sum payment  is a great help when the buyer is not in a position to make the lump sum payment in cash for the goods or service. But have you ever calculated how much ‘extra’ you pay with your hard earned money for this privilege? Let us see some of the products that are available on EMI and how it works.

1. You purchase home worth Rs. 30,00,000 and commit to pay the Bank Rs. 24,00,000 (i.e., 80% of the property value) at 11% rate of interest over the next 20 years. Do you know how much interest you are going to pay the bank….. it is 44,31,000. Yes, 60% of your loan payment goes towards interest. To make the EMI affordable one has to stretch the loan tenure which in turn increases the interest payable on such loans.
2. If you take a car loan of Rs. 4,00,000 and agreed to pay it over next 5 years then you actually end up with paying Rs. 5,30,000 (assuming 12% rate of interest). Further, what is the value of the car after 5 years. Note that here you are paying interest on a depreciating asset.
3. Same thing happens when you purchase home appliances or that trendy new gadget. No matter what the rate of interest is, you end up with paying extra amount for a depreciating commodity. Moreover, the stores may offer such deals to get rid of old stock, so if you are lured by the installment option now, where will be your new toy after 6 months?

Is paying EMI altogether bad then? Of course not. At times, it is an excellent way of making purchases. The problem is, it tempts us to spend on the things which we really do not need – remember there is a huge difference between ‘want’ and ‘need’ – and it forces us into debt trap. Even though an item is unaffordable, we tend to consider it affordable when the price is divided into several small chunks. Definitely there is a difference between ability to pay for the goods and ability to pay the EMI. It is not advisable to go for a thing just because the EMI is affordable. So before going for such schemes just consider the following points and make sure this boon does not lure you into overspending:

• Nowadays big retailers offer different deals and discounts to their customers on various goods such as home appliances and electronic gadgets. So, let alone home or car, we now have the option to purchase even the consumer and electronic goods like camera or mobile phone through easy instalments. Such deals often tempt the people to make big purchases well beyond their means. Wait, in some days they may even offer apparels and cosmetics through installments, so that you may be able to purchase your favorite Levi’s jeans or Revlon nail polish in installments!
• Sometimes the stores offer such deals for old model gadgets and electronic items to get rid of the stock. So if you purchase it through installments, what is the value of this toy in 6 – 9 months?
• While the cash discounts are straight forward, the buyers should understand the complex deals such as 0% interest schemes. Here the stores offer various consumer durable goods to the credit card holders of recommended banks with 0% interest. Now let us see how such schemes work through an example.

Suppose if you buy an LCD TV worth Rs. 40,000 with 10 % cash discount, then you have to pay Rs. 36,000. It is simple and easy to understand. In case of EMI with 0% interest the same deal will work like this. You purchase the TV for 40,000 and agree to pay the amount in 4 installments of  Rs. 10,000 each. For this you have to pay around Rs. 2,000 as processing / transaction fee. Thus you are actually paying Rs. 42,000 for the TV whose actual price is Rs. 36,000 and you end up paying Rs. 6,000 extra under the 0% interest scheme. Assuming you pay an installment every month, paying Rs. 6,000 extra is equivalent to paying 50% annual interest on the Rs. 36,000 loan amount. Remember, there is no free lunch in this world.

• Although such information is not mentioned anywhere in their publicity material the stores often offer compliments for cash purchases. So if you purchase a laptop you may get a laptop bag or an USB drive with it free of cost. So try to understand the deals.

Conclusion

Be it a home or a car or any consumer goods or an air ticket or a vacation, just because you can pay the installments does not mean that you can afford it. Ability to pay installments is different from capacity to afford it.

Paying home loan through installments is understandable as it is very difficult to make the full payment for majority of us. But what is the rationality behind purchasing the consumer goods via EMI and paying more while its value definitely depreciates over time? Living continuously in debt and paying high interest will seriously affect one’s financial health and may create a serious repercussion later in life.

So if you got a boon use it wisely…read Bhasmasura’s story again!