If you shop regularly from Flipkart or Amazon website/apps, you must already be aware of the instant discount and No-cost EMI offers. These e-tailers run such promotions regularly to attract buyers.
In case of an instant discount, if you use a specific credit card or debit card for payment, you get an upfront discount. Suppose an item sells for Rs 50,000. If you use a credit card/debit card from a particular bank, you may have to pay only Rs 45,000 (10% instant discount).
In case of No-cost EMI, you do not get any upfront discount. You must still pay Rs 50,000. However, you must pay the amount in 3,6 or 9 months. Let’s say you opt to pay in 9 months. In such a case, you will have to pay Rs 5,555.55 per month for 9 months. From your perspective, it is a loan at 0% interest rate. For more on how No-cost EMI work, refer to this post. No-cost EMI technically involves an upfront discount followed by an interest-bearing loan. That’s why it is called a No-cost EMI and not a zero interest EMI. Moreover, you pay slightly more because of the GST on interest component.
What if you had to choose between the two? Let’s say Amazon/Flipkart offers an instant discount on credit card X and offers No-cost EMI on credit card Y. We assume you can’t get both the offers (Instant discount and the No-cost EMI) on the same purchase. Usually, that’s the case too. Which one would you choose?
How Do You Approach the Problem?
The first is about the cash flows. If you think you will find it difficult to pay Rs 45,000 (50,000- 10% instant discount) by the next due date (30-45 days), then instant discount may not really be an option. You must go for the No-cost EMI or even a regular EMI. If you are indifferent about paying now or over the next few months (you have no capital issues, but you just want to optimize), you may have to do a bit of math. Your options are:
- Pay Rs 45,000 now.
- Pay Rs 5,555.55 over the next 9 months
Approach 1: Investment Returns You Need to Generate
By not paying Rs 45,000 now, you are taking up the liability of Rs 5,555.55 over the next 9 months. If you were to invest Rs 45,000 on the date of purchase, what is the investment return you will have to generate to match monthly outgo of 5,555.55 over the next 9 months? While the timing of monthly payment (can range from 21 to 52 days) may vary depending on the credit card due date, I assume that you must make the payment from the next month. You need to generate about 2.16% per month (over 26% p.a.) to be able to meet the monthly payments. Quite difficult. Instant discount is the winner.
What if the instant discount was only 5% (i.e., you need to pay Rs 47,500 after instant discount)? You need to generate about 1.04% per month or 12.46% per annum. Much lower but still quite high. Instant discount is still the winner in my opinion.
What if you opt for a 6-month No-EMI tenure?
- You need to generate 1.49% per month or 17.8% per annum in case of a 5% instant discount.
- You need to generate 3.1% per month or 37% per annum in case of a 10% instant discount.
Hence, the shorter the No-cost EMI loan tenure, the case for going for instant discount becomes stronger.
Instant discount will likely win.
Note: GST is charged on the interest portion of the No-cost EMI. I have ignored the impact of such GST payments in these calculations. Including the impact will favour instant discount option.
Approach 2: Calculate Notional Discount in No-Cost EMI
There is another way to look at this, albeit not very practical. This may not be the right approach either, but it is good to know, nonetheless.
We know from the detailed post on No-cost EMIs that such offers include an upfront discount followed by an interest-bearing loan. For instance, let’s say the bank loan interest rate is 13% p.a. For a No-cost EMI, you will get an upfront discount so that the resulting loan leads to an EMI (equal to no cost EMI) at 13% p.a.
- Purchase amount: Rs 50,000
- No-cost EMI tenure: 9 months
- Interest rate: 13% p.a.
- No-cost EMI: 50,000/9 = Rs 5,555.55
- Loan Amount: You can use PV function (or our loan amount calculator) to figure what loan amount would lead to an EMI of 5,555.55 for 9 months at 13% p.a. That amount is Rs 47,395
- Upfront discount = Rs 50,000 – Rs 47,395 = Rs 2,605
Let’s further assume that after opting for instant discount, you had to opt for a regular EMI at 13% (same as implicit interest rate for No-cost EMI).
- You get a discount of Rs 5,000 (higher than Rs 2,605) with an instant discount of 10%. This will result in an EMI of Rs. 5,274 (45,000, 13% p.a., 9 months). Lower than Rs. 5,555.55.
- You get a discount of Rs 2,500 (lower than Rs 2,605) with an instant discount of 5%. This will result in an EMI of Rs. 5,567 (47,500, 13% p.a., 9 months). Just higher than Rs. 5,555.55.
Note that the outcome (for either of the approaches) may be different depending on the quantum of instant discount (5%, 10% etc.) and tenure of no-cost EMI.
- The higher instant discount and shorter no-cost EMI tenure will tilt the scale in favour of Instant discount.
- The lower instant discount and longer No-cost EMI tenure will tilt the scale favour of No-cost EMI.
Given the quantum of instant discounts we usually see and given that the tenure of no-cost EMI can’t be too long, instant discount will be the likely winner.