When you buy a product from an e-commerce website, you have multiple options to pay through credit. You can pay in full or through merchant EMIs. You can pay in full and later request your bank to convert this purchase into a loan (EMIs). OR you pay in full and take out a separate personal loan to pay for the expenses. Which option is better? I have covered slight tangents of this topic in two earlier posts.
Related Posts
In this post, we focus only on the loan options.
- Merchant EMI
- Convert the expense into a loan. EMI charged to credit card.
- Spend on credit card. Take out a personal loan separately and pay off the card balance.
No discounts, cashbacks, or reward points. We compare only on the ease of access and the cost.
What Are the Loan Options Available?
Merchant EMI: At the time of checkout itself, the merchant offers an option to convert your purchase into EMIs. No-cost EMI deals are a form of merchant EMIs.
- Instant approval/access. You don’t have to apply your bank for approval.
- The EMI installments are charged to your credit card every month. GST shall be charged on the interest component of the EMI.
- The bank may charge processing fees too.
- Your credit card is charged the full amount at the time of payment and the purchase amount is automatically converted to EMI after a few days.
Converting to Loan post EMI: Most banks also offer you an option to convert your big purchases into loans. You can also easily do this from your bank mobile app or net banking site.
- Since the bank itself is offering, the approval is also almost instant.
- However, from what I have seen, both the rate of interest and the processing fee tend to be higher than the merchant EMI. Hence, if you know upfront that you are going to convert your purchase into an EMI, taking up the merchant EMI option is the best choice.
- The EMI installment shows up in the credit card statement and the GST is charged on the interest component of the EMI.
Personal Loan: You keep the purchase and the credit separate. You have bought the product using your credit card. Now, you cannot pay the amount in full. You request your bank for a personal loan separately and use the proceeds to set off the credit card bill.
- The interest rate will likely be lower than Option #2. It can be higher or lower than Option #1.
- Loan approval may not be instant and may take time.
- The processing fee will likely be higher than Option #1. May be higher or lower than Option #2.
- You may get a longer loan tenure than Option #1 and #2.
- The EMI must be paid separately. Does not show up on credit card. GST shall not be charged on the interest component of the EMI.
What Should You Do?
The difference between the three options is in terms of ease of access, the rate of interest, processing fee, and the loan tenure. GST on interest component of EMI won’t move the needle too much, especially if the loan tenure is short.
If you know upfront that you can’t pay upfront and would be eventually converting this purchase into EMIs, No-cost EMI, which is a variant of merchant EMI, is an easy winner. No other option would come close. The upfront discount (to give you the impression of no-cost EMI) makes it almost zero cost for you. Also, remember that No-cost EMIs are not necessarily zero cost.
The only problem with No-cost EMI is that you may not always get an option of No-cost EMI. Additionally, given your no-cost EMIs work, the loan tenure is usually 3 to 6 months. 9 months maximum in rare cases. Hence, you won’t get a longer tenure with No-cost EMIs.
If you want a longer tenure, we look beyond no-cost EMIs.
Your choice is between regular merchant EMIs, Credit card EMI conversion, or a separate personal loan.
Credit card EMI conversion is likely to be the worst choice — in terms of processing fee and the rate of interest.
Between merchant EMI and a separate personal loan, the merchant EMI is an easy winner on speed of approval (access) and will also likely have a lower processing fee than the personal loan.
However, a personal loan may have a lower rate of interest (no guarantee though) than the merchant EMI. You can get a better rate of interest in a personal loan if your credit score is good. With merchant EMI, everyone gets the same rate of interest. Additionally, with a personal loan, you may be able to get a longer loan tenure. Up to 5 years.
However, there is a practical problem. Merchant EMI is possible only at the time of purchase. For an objective comparison between merchant EMI and personal loan, you must know the terms of personal loan.
However, how do you know the terms (interest rate, processing fee etc.) for a personal loan without applying for the personal loan? Application itself may be a lot of work. You can’t keep applying and withdrawing the loan application. Such behaviour may also affect your credit score. Additionally, if you skip the merchant EMI, what if personal loan application gets stuck or get rejected for some reason? You can’t keep applying to multiple banks to get through. Multiple applications will affect your credit score.
The way out is that you get some sense of the overall cost structure of the personal loan (interest rate, processing fee etc.) from the bank’s website. If the loan terms are better than what you would get from merchant EMI, you get the loan approved and sanctioned before the purchase.
If you don’t want many hassles, merchant EMI is an easy way out.
| Feature | Merchant EMI (No-Cost/Regular) | Credit Card EMI Conversion | Separate Personal Loan |
| Ease of access/Approval (Loan approval time) | Instant at Checkout | Instant (via Bank/App) | Few Hours to Days. (Approval not guaranteed) |
| Interest Rate | 0% (No-Cost EMI) OR 12%-18% (if regular EMI) | 16%-24% (higher than personal loans) | 10%-18% (lower than credit card EMI) |
| Processing Fees | Possible (1%-2%. Usually, there is a cap) | 1%-2% (Usually no fee cap) | 1%-3% (Usually no fee cap) |
| Loan Tenure | Up to 24 months | Up to 36 months | Up to 60 months. You have flexibility in choosing tenure |
| Prepayment/Foreclosure Charges | Yes | ||
| Credit Limit Impact | Credit limit gets blocked up to the purchase amount. Gets released gradually as EMIs are paid | No effect on credit limit | |
| GST on Interest component of EMI | Yes | Yes | No |
| Our Verdict | Best option if No-cost EMI is available. For regular EMIs too, this ranks high due to instant approval. | Most likely the worst option. | Good option if you prefer a longer tenure. OR if you can get a low interest rate. |
| *The opinion may change when the facts change (interest rate, processing fee, desired loan tenure) | |||