The Hidden Cost of Instant EMIs and EMI Conversion

EMIs make it easy and convenient to buy online. But even with EMIs, you have multiple options. You can opt for Instant EMIs (also called Merchant EMI) directly on the merchant website. Or you can pay the full amount upfront and later ask your bank to convert the purchase amount to EMIs. Which option is better?

Option 1: Instant EMI

When I use the words “Instant EMI”, I am referring to the EMI options available directly on the merchant website. You would see this quite often on Amazon and Flipkart. While your credit card gets debited with the full amount, the purchase is automatically converted into EMIs (loan) after 3-4 days. You do not have to send a separate instruction to the bank. These EMIs are sometimes also called Merchant EMI.

No-cost EMIs also fall in this category. However, no-cost EMI give you an impression of zero cost by offering an upfront discount and then charging interest on the discounted amount. When I refer to “Instant EMIs”, I assume no such relief upfront discount. So, no discount and regular EMIs. You pay extra money (over and above the purchase amount) in the form of interest. Instant EMIs are more widely available than No-cost EMIs. No-cost EMI schemes are usually on specific cards and for limited periods.

Option 2: Convert to EMI

Conversion to EMI is when you make the full payment on the website and subsequently ask your bank to convert the purchase to EMIs.

If you are purchasing an item with a clear intent to later convert the payment to EMIs, then which option is better? Depends on where you pay less. First, let’s look at the costs.

What Are the Costs?

Depends on your bank.

With some banks, the only cost is the interest cost and the GST (18%) on the interest component of the EMI. The interest rate for these loans is usually high and ranges from 13%-16% p.a. However, since these are short term loans (3-24 months), the impact of high interest rates is not very high. Clearly, the shorter the loan tenure, the lower the impact.

Loan / Purchase AmountInterest RateTenure (Months)EMITotal PaymentTotal Excess payment (interest)Difference (due to interest rate)

As you can see, the impact is not huge despite the doubling of the interest rate from 8% to 16% p.a.

But There Could Be a Processing Fee

Not all banks charge a processing fee for such transactions, but a few banks certainly do. And we know that processing can increase the overall cost of credit for short-term loans.

Take an example of ICICI bank credit cards.

  1. For Instant EMIs (on merchant websites), ICICI charges 199 + GST as processing fee (irrespective of the amount). For a Rs 20,000 loan, you will be Rs 234 as processing fee.
  2. For conversion to EMI, ICICI Bank charges 2% of the purchase amount +GST as processing fee. There is no floor or cap on the processing fee. For a Rs 20,000 loan, you would pay Rs 472 as processing fee.

That’s as much as the difference between 8% and 16% interest rate for a 6-month loan.

Still, we tend not to pay much attention to processing fees. While I say this, there is not much you can do about processing fees for online loans. It is non-negotiable.

Important for Amazon Pay ICICI Credit Card

These charges are applicable to Amazon Pay ICICI Credit Card too.

An important point to note here is that you do not get cashback for EMI transactions on Amazon Pay Credit card. Therefore, if you are a Prime member and buy from Amazon on Instant EMI or later convert to EMIs, you won’t get any cashback. So, you pay a processing fee (199 or 2% depending on EMI mode chosen) and lose out on cashback too. Account such aspects while calculating your overall cost of credit.

Let’s say you bought an item worth Rs 20,000 from Amazon on Instant (Merchant) EMI. You opt for a 6-month EMI. You pay a processing fee of Rs 199 + GST. Plus, you lose out on cashback worth Rs 1,000.

Purchase Amount = Rs 20,000

Interest Rate = 16% p.a.

Tenure = 6 months

Processing Fee = Rs 199 + GST = 234.82

EMI = Rs 3,491

Cashback lost due to EMI = Rs 1,000 (5% cashback to Prime members)

Effective cost of this loan = 39% p.a. The loan interest rate is still only 16% p.a. but the cost of credit is now 39%. That’s the impact of processing fee and lost cashbacks.

If You Are Planning to Buy on EMIs, Consider the Following Aspects

Whether “Instant EMI” or “Conversion to EMI” will be better. You just need to figure out where you will pay less. The difference between the two can arise for the following reasons:

  • Difference in Processing fee
  • Difference in Interest Rate
  • Sometimes, the bank can offer different tenure options for the two types of EMIs. Choose as per your cash flow situation
  • The impact of lost cashbacks and rewards if you buy on EMIs
  • A shorter tenure reduces the absolute interest cost impact
  • Instant EMIs can even be No-cost EMI. Thus, if there is a No-cost EMI offer on your credit card, this will likely be the best option (even after the processing fee). You need to evaluate the impact of lost cashback here too

Now, on to the usual caveats. While there is nothing wrong in using credit, you can get into debt trouble if you are irresponsible. EMIs make purchases quick and affordable but all debt must be repaid. Before opting for EMIs, ensure that you don’t overborrow and that your future cash flows will be easily able to support those EMIs. Also remember, your EMIs don’t have the sole claim over your future cash flows. You have financial goals and responsibilities too and you must invest for those goals too. If you borrow too much, you may not be able to invest for those goals. If that’s the case, you are sacrificing your future for your present. And that’s not the right thing to do. Keep things simple and small things in mind while taking credit and buying on EMIs.

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