How Can a No-Cost EMI Become Expensive?

Yes, that’s possible and it is all mathematics. In this post, let’s understand how this can happen. Before we go there, let’s do a quick recap of how No-cost EMIs work.

How No-Cost EMIs Work

1. You purchase an item worth Rs X. You opt for the No-cost EMI option (let’s say 6 months) on the payments page.
2. You get an upfront discount of Rs Y from the merchant such that the loan of (X-Y) results in an EMI of X/6 at the prevailing rate of interest. Usually, the brand or the merchant bears the cost of the discount.

Let’s understand this with an example. You make a purchase of Rs 25,000 and opt for 6-month No-cost EMI on the payments page. You get an upfront discount of Rs 921.2 (assuming 13% p.a. interest) and your credit is charged Rs 24,078. After a few days, your bank automatically converts the amount into an EMI based loan. And the EMI is Rs 4,166.7 (25,000/6) for 6 months. You pay Rs 25,000 over 6 months.

Understanding the Impact of GST

Well, you do pay a bit extra. You will pay a little more than Rs 25,000 over the next 6 months. How? Because GST is applicable on the interest portion of the EMI.

 Month Outstanding Amount EMI Principal Repaid Interest paid GST Total EMI 1 ₹ 24,079 ₹ 4,167 ₹ 3,906 ₹ 261 ₹ 47 ₹ 4,214 2 ₹ 20,173 ₹ 4,167 ₹ 3,948 ₹ 219 ₹ 39 ₹ 4,206 3 ₹ 16,225 ₹ 4,167 ₹ 3,991 ₹ 176 ₹ 32 ₹ 4,198 4 ₹ 12,234 ₹ 4,167 ₹ 4,034 ₹ 133 ₹ 24 ₹ 4,191 5 ₹ 8,200 ₹ 4,167 ₹ 4,078 ₹ 89 ₹ 16 ₹ 4,183 6 ₹ 4,122 ₹ 4,167 ₹ 4,122 ₹ 45 ₹ 8 ₹ 4,175

Now, this GST payment is extra. Over 6 months, you pay GST of Rs 166 extra. Hence, total payment of Rs 25,166 and not Rs 25,000. If you consider this as IRR (loan of 25,000 and the 6 EMIs as mentioned above), the GST component increases the cost from 0% to 2.27% p.a. So, really not a problem.

Provided the loan tenure is 6 months and loan interest rate is 13% p.a., the GST component will increase the cost from 0% to 2.27% p.a., irrespective of the purchase amount.

Don’t Ignore the Processing Fee and Ancillary Charges

Clearly, GST alone does make this expensive. Then, how can the No-cost EMI become expensive? Enter the processing fee or other ancillary charges. Let’s say, for each No-cost EMI, you have to pay a fee of Rs 199 (excluding GST).

 Month Outstanding Amount EMI Principal Repaid Interest paid GST Processing fee (incl. GST) Total EMI 1 ₹24,010 ₹4,167 ₹3,887 ₹280 ₹50 ₹235 ₹4,452 2 ₹20,124 ₹4,167 ₹3,932 ₹235 ₹42 – ₹4,209 3 ₹16,192 ₹4,167 ₹3,978 ₹189 ₹34 – ₹4,201 4 ₹12,214 ₹4,167 ₹4,024 ₹142 ₹26 – ₹4,192 5 ₹8,190 ₹4,167 ₹4,071 ₹96 ₹17 – ₹4,184 6 ₹4,119 ₹4,167 ₹4,119 ₹48 ₹9 – ₹4,175

The processing fee increases the cost of No-cost EMI scheme (Rs 25,000 and the 6 EMIs) from the 2.27% p.a. (due to GST alone) to 5.52% p.a.

Here, the quantum of purchase amount plays a role. For a smaller purchase amount, the increase in effective cost will be higher. Because the processing is irrespective of the loan amount.

• For the purchase amount of Rs 10,000, the effective cost of No-cost EMI goes up to 10.44% p.a.
• For the purchase amount of Rs 50,000, the effective cost goes up to only Rs 3.89% p.a.

I have taken the processing fee as just an example. The fee/charge could come with a different nomenclature but cost is cost. Before signing up, you must be very clear about any ancillary charges.

Sometimes You Get Cashback on Full Payments

Let’s say you own an ICICI Amazon Pay Credit card. You want to buy a phone worth Rs 25,000. You have two options.

• You pay upfront. You get 5% cashback (for prime members). Net cost = Rs 25,000 – 5%*25,000 (cashback)= Rs 23,750
• You buy on No-cost EMI. As per terms and conditions of the card, cashback is not available on EMI transactions.

Hence, to get a sense of the true effective cost of No-cost EMI, we consider a loan amount of Rs 23,750 and the six EMI (total of 25,178 over 6 months). The cost shoots up to 20.37% p.a.

If we include the impact of processing fee, the cost jumps to 23.65% p.a. Now, that’s an expensive loan.

By the way, you will have a similar issue with the Flipkart Axis Bank card too.

How Does All This Matter?

It matters because unless you understand the true cost of purchase mode, you won’t be able to make the right choice. Let me give you a few options.

1. Pay upfront (no cashback)
2. Pay upfront (5% discount/cashback)
3. Take a loan from ABC bank at 13% p.a. for 6 months
4. Take a loan from FGH bank at 13% p.a. for 6 months. Upfront 5% discount.
5. No-cost EMI from LMN bank for 6 months
6. No-cost EMI from XYZ bank for 6 months (Processing fee of Rs 199)

It is possible that a regular loan might turn out to be more cost efficient than a No-cost EMI loan.

Option 3 (Take a loan from ABC bank at 13% p.a. for 6 months)

 Month Outstanding Amount EMI Principal Repaid Interest paid GST Processing fee (incl GST) Total EMI 1 ₹25,000 ₹4,326 ₹4,055 ₹271 ₹49 – ₹4,375 2 ₹20,945 ₹4,326 ₹4,099 ₹227 ₹41 – ₹4,367 3 ₹16,846 ₹4,326 ₹4,144 ₹182 ₹33 – ₹4,359 4 ₹12,702 ₹4,326 ₹4,188 ₹138 ₹25 – ₹4,351 5 ₹8,514 ₹4,326 ₹4,234 ₹92 ₹17 – ₹4,343 6 ₹4,280 ₹4,326 ₹4,280 ₹46 ₹8 – ₹4,334 Total ₹26,129

Option 4 (Take a loan from FGH bank at 13% p.a. for 6 months. Upfront 5% discount)

 Month Outstanding Amount EMI Principal Repaid Interest paid GST Processing fee (incl. GST) Total EMI 1 ₹23,750 ₹4,110 ₹3,852 ₹257 ₹46 – ₹4,156 2 ₹19,898 ₹4,110 ₹3,894 ₹216 ₹39 – ₹4,149 3 ₹16,003 ₹4,110 ₹3,936 ₹173 ₹31 – ₹4,141 4 ₹12,067 ₹4,110 ₹3,979 ₹131 ₹24 – ₹4,133 5 ₹8,088 ₹4,110 ₹4,022 ₹88 ₹16 – ₹4,126 6 ₹4,066 ₹4,110 ₹4,066 ₹44 ₹8 – ₹4,118 Total ₹24,822

Option 5 (No-cost EMI from LMN bank for 6 months)

 Month Outstanding Amount EMI Principal Repaid Interest paid GST Processing fee (incl GST) Total EMI 1 ₹24,079 ₹4,167 ₹3,906 ₹261 ₹47 – ₹4,214 2 ₹20,173 ₹4,167 ₹3,948 ₹219 ₹39 – ₹4,206 3 ₹16,225 ₹4,167 ₹3,991 ₹176 ₹32 – ₹4,198 4 ₹12,234 ₹4,167 ₹4,034 ₹133 ₹24 – ₹4,191 5 ₹8,200 ₹4,167 ₹4,078 ₹89 ₹16 – ₹4,183 6 ₹4,122 ₹4,167 ₹4,122 ₹45 ₹8 – ₹4,175 Total ₹25,166

Option 6 No-cost EMI from XYZ bank for 6 months (Processing fee of Rs 199)

 Month Outstanding Amount EMI Principal Repaid Interest paid GST Processing fee (incl GST) Total EMI 1 ₹24,079 ₹4,167 ₹3,906 ₹261 ₹47 235 ₹4,448 2 ₹20,173 ₹4,167 ₹3,948 ₹219 ₹39 – ₹4,206 3 ₹16,225 ₹4,167 ₹3,991 ₹176 ₹32 – ₹4,198 4 ₹12,234 ₹4,167 ₹4,034 ₹133 ₹24 – ₹4,191 5 ₹8,200 ₹4,167 ₹4,078 ₹89 ₹16 – ₹4,183 6 ₹4,122 ₹4,167 ₹4,122 ₹45 ₹8 – ₹4,175 Total ₹25,401

And we can see, option 4 turned out to be the best. You paid the least in this option. The upfront discount tilted the balance in its favour.

By the way, you could pay upfront (take 5% discount/cashback) and later ask your bank to convert this purchase into an EMI. I suggest you try out the effective cost.

Have the No-cost EMI schemes suddenly become bad? No, the schemes haven’t. Whether you opt for an outright purchase or a loan is also a function of your cashflows. With No-cost EMI, you can spread out the cash outflow over a few months, which is good. However, do look out for any non-interest charges. Such charges will increase the effective cost. Moreover, look out for any discount on full payments or on regular EMI payments. Unless your cashflows are a problem, this will likely be the best option.