The trap of no-cost EMI that you can’t escape

Yeah! Let’s understand how this works.

There are three players in this process

1. Merchant (The seller)
2. Bank (The credit/debit card issuer)
3. We (The consumer)

The concept of EMI exists so that banks can earn interest through the customer’s incapability to make lumpsum payment right away. So, someone is definitely paying interests to the banks.

When we choose the No-cost EMI option at the payment page, we are immediately prompted:

1. The total payable amount
2. The interest calculated, which is actually being waived off from the total payment as a discount given to US.
3. The tenure for which the no-cost EMI will run.

So we think we are paying the full price of the product (after other offers and schemes) in 3-6-9-12 months without any interest. But that’s not true.

The total payable already includes the interest that you would pay on the ACTUAL COST of the product.

If we purchase an asset for Rs. 29,990 at no cost EMI for 12 months, we see that on this amount, the interest calculated is Rs. 2,156. However, the bank is only asking us to pay the principal in the next 12 months at Rs. 2500 per month.

12*2500 ~= 30,000

But, in reality, had the only option been of full payment, the seller would have charged only Rs.27,834 = 29,990 - 2,156

So, eventually, we do end up paying interest under the hood.

1. The seller makes his sale and the desired profit.
2. The banks get the interest, the processing fee, and marketing for offering ‘No-cost EMI’.
3. You get to buy a more expensive item than you probably needed because you didn’t have to pay the price upfront.

The best you can do, to take advantage f such schemes is to choose the No-cost EMI option, and earn interest in your savings account by not paying the entire money in advance. But this suggestion comes with a big DISCLAIMER: DO NOT MISS YOUR CREDIT CARD PAYMENT DUE DATE or this boon can become a bane.