Your laptop has just conked off. A new laptop would cost you Rs 75,000. While 75,000 may not be a big amount for you, you foresee some stress on cash flows and would prefer not to pay at one go. A simple way out is to pay through your credit card and convert the purchase amount into EMIs. There are two ways in which you can convert your purchase into EMI.
Two Modes of Credit Card EMIs
- At the time of purchase: This is also called “Merchant EMI” or “Instant EMI.” All major retail apps/websites offer you this option. You convert your purchase into EMI right at the time of purchase. While your card is charged the full amount, the bank automatically converts the expense into a loan after a few days, and you must repay the loan in EMIs. You do not have to approach the bank for anything. The EMIs are charged directly to your credit card every month.
- Post-purchase conversion: You pay using your credit card. After a few days, you reach out to the bank to convert your purchase amount into EMIs. You also get this option on banking apps and websites. In this case too, the EMI is charged to the credit card.
Pros of Credit Card EMIs
- Flexibility: Your cash outgo gets spread over multiple months easing the burden. You can choose the tenure based on your cashflow outlook.
- Easy Approval: There is no formal application process. You opt for merchant EMIs at the time of purchase. Even for post-purchase conversion, it only requires a few clicks or taps.
- Lower cost than revolving debt: EMIs are clearly lower cost than revolving credit card debt every month. Revolving credit card debt will cost you 36-45% p.a. in interest cost.
Cons of Credit Card EMIs
- Additional Cost: Additional cost in the form of interest and processing fee.
- No interest-free credit period: You get an interest-free credit period on credit card payments. However, on conversion to EMI, there is no concept of an interest-free credit period. You pay interest from day 1.
- Blocking of credit limit: Your credit limit gets blocked up to the outstanding loan amount. Had you paid back in full, your credit limit would have been completely released. In case of conversion to loan EMIs, your credit limit would get released gradually.
- Foreclose charges: In case you want to foreclose the loan sooner, you may have to incur foreclosure charges.
- Ineligibility or withdrawal of rewards: You get reward points/benefits for credit payments. However, those benefits may be withdrawn if you convert card expense to EMIs. For instance, ICICI Amazon Pay credit card provides 5% cashback for prime members (3% for non-prime members). However, you do not receive any cashback for purchases on EMIs. This applies to both merchant EMIs and conversion to EMIs post purchase.
- GST impact: GST is charged on the processing fee. GST is also charged on the interest component of the EMI. You incur this specific GST over and above the EMI. Therefore, you pay slightly more than the EMI. However, since these loans are short-term, the interest component of the EMI is not very high.
You can use this calculator to plug in values and assess the impact of processing fee and GST on your overall outgo.
For instance, a credit card expense Rs 75,000 converted to EMIs at 18% for 6 months and processing fee of 1% (plus GST) would have an EMI of Rs 13,164.
- Processing Fee: Rs 750 + 18% GST = Rs 885
- Total Interest Payable = Rs 13,164 X 6 – Rs 75,000 = Rs 3,984
- GST on interest = Rs 718
- Hence, in total, to square off this loan, you pay Rs 885 + Rs 13,164 X 6 + Rs 718 = Rs 80,587. So, you pay Rs 5,587 extra over 6 months (compared to full upfront payment)
If we reduce the interest rate to 12% p.a. (everything else being the same), then the total outgo goes down to Rs 79,008.
Which Approach Is Better?
If you are clear that you will need to convert this purchase into EMIs, it is better to opt for Merchant EMIs (right at the time of purchase). Why?
- It is quick, easy, and convenient. Hassle-free.
- You will likely pay a much lower processing fee. In merchant EMIs, the processing fee will be a nominal amount or a small percentage (less than 1%). In case of post purchase conversion, I have seen much higher rates. 2% is quite common.
- You will likely pay a much lower interest rate. Interest rate for merchant EMIs tends to be around 12-15% p.a. If you are lucky, you may also get the option of No-cost EMI. For post-purchase conversion, you are unlikely to get a rate lower than 16-18% p.a.
Point to Note: Merchant EMIs are usually for very short tenure. In most cases, the tenure will not exceed 12 months. If you need a longer rope, then you might consider post-purchase conversion.
EMIs Feel Light, It’s Still a Loan
Converting your purchase into EMI may make your life easier. However, there is a need to be responsible too.
If the convenience of EMIs is making you spend more, we have a problem. You may take things too lightly, which is never good. Debt can go out of hand quite quickly.
Be responsible.