Merchant EMI vs. Credit Card EMI

You plan to buy an expensive phone from Flipkart or Amazon. You do not have the free cash to buy the phone outright or settle the credit card dues in a month’s time.  What can you do?

You can buy the phone on EMIs. You have two options.

  1. You take the EMI offer available on the e-commerce website.
  2. You pay the amount in full and later ask your bank to convert the credit card dues into EMIs.

What is the difference? Which option is more cost-efficient? To avoid any confusion, let us use the following nomenclature.

  1. Merchant EMI: You avail the EMI offer listed on the e-commerce website. Your credit card is charged the full amount initially but the bank automatically converts the transaction amount into EMIs in a few days. You do not have to request the bank separately.
  2. Credit Card EMI: Here also, you make the full payment on the shopping site. Subsequently, you approach the bank to convert your dues into EMIs.

Let us consider the following aspects.

#1 Availability

The EMI facility on e-commerce websites may not be available for all the products. It may be available for only specific items. That makes it a bit restrictive. If you plan to convert your credit card outstanding to a loan, there is no such restriction. For instance, Citibank allows you  to convert purchases in excess of Rs 2,500 into EMIs.

#2 Processing Fee

Usually, there is no processing fee charged if you avail the Merchant EMI on the e-commerce website. On the other hand, if you request you bank to convert your credit card dues into a loan (and pay EMIs subsequently), you will likely be charged a processing fee of 1-2% of the loan amount. Citibank charges 2.5% of the loan amount, subject to a minimum of Rs 200, as the processing fee.

For short duration loans, the processing fee impacts the effective cost of loans in a big way. And these are usually short duration loans, ranging from a few months to a couple of years.

#3 Interest Rate

The merchant/brand may get you a better interest rate on the loan. A No-cost EMI is a classic example. The merchant offers you an upfront discount such that all the loan EMIs (including interest) add up to the listed price of the item.  You will not get such a deal in case of credit card EMI. To push sales (merchant EMI), the merchant may bear some cost (interest cost or processing fee). Do note everything is built into the transaction. You wouldn’t even know about this.

However, there is no guarantee. It is possible that you will get a fine rate on credit card EMI too. Therefore, unless you are getting a No-cost Merchant EMI, you can compare the interest rate for Merchant EMI and the credit card EMI and decide accordingly.

The Merchant EMI is likely to be winner though.

At the same time, you must note that interest rate does not affect the absolute outgo in a big way for a short-term loan. For instance, a loan of Rs 50,000 for 6 months at 15% p.a. interest rate will have an EMI of 8,701. Had the interest rate been 20% p.a., the EMI would have been Rs 8,826 per month. A difference of Rs 125 per month. Over 6 months, this translates to a difference of Rs 750 over 6 months.

Just to contrast, a processing fee of 2% will be Rs 590, after including 18% GST. And I have mentioned above that merchant EMI won’t have processing fee while the credit card EMI will have processing fee.

#4 Loan Duration

This is perhaps the only area where the credit card EMI will score over merchant EMI.

Merchant EMIs are usually for a few months to a year. No-cost EMIs don’t have tenures of greater than 6 months. Why? Because, longer the repayment tenure, greater the tab the merchant must pick up. Even for interest-based merchant EMIs, the duration will usually not exceed 12 months.

For the credit card EMIs, you can get a longer rope. Your bank may offer you up to 2-3 years to pay the EMI.

We know, shorter the repayment tenure, higher the EMI. And vice-versa. If you are struggling with cash flows, you might prefer a longer repayment schedule.

What Should You Do?

Let’s begin with the usual pointers.

Don’t overspend. Don’t overborrow. After all, you must repay all loans. Perhaps, an expensive phone can wait. If you can’t wait, between the merchant EMI and the credit card EMI, the merchant EMI is a likely winner. There is no processing fee. You are also likely to get a fine deal on the interest rates. Moreover, the repayment schedule is quite crisp, and you know that upfront.

In case of credit card EMI, while you can do calculations on your own, you still need to wait for the bank offer (you can check the offer on mobile apps or websites).

What do you prefer? Merchant EMI or the credit card EMI?

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