Is 'no-cost EMI' really free, or are there hidden costs lurking?

As Diwali approaches, many millennials are gearing up for significant purchases. The rise of fintech companies offering "Buy Now, Pay Later" options has made shopping more convenient than ever. While no-cost EMI can be a convenient way to make significant purchases, it's not entirely devoid of costs, say experts.

Behind no-cost EMI

No-cost EMI, a payment method offered by retailers and financial institutions, allows you to buy products and pay in manageable instalments without added interest fees. It's a favourite amongst shoppers, as it spreads the cost of high-value items, making them more budget-friendly.

"It's important to note that no-cost EMI isn't entirely cost-free. Retailers and financial institutions often profit from this arrangement by charging retailers a higher interest rate than they would offer to regular loan applicants. Additionally, some may impose processing fees. Eligibility for no-cost EMI can also vary between retailers and institutions," said Tejpal Singh Shekhawat, Founder & CEO, Kalyanam Furniture.

Explaining the concept, Shekhawat said, "It's about dividing the product cost into interest-free monthly instalments, offered in two variations."

1. Discount equivalent to interest rate: Retailers offer a discount on the product equal to the interest rate of a typical EMI plan. This allows customers to pay the same total amount for the product while extending the payment duration.

2. Product cost inclusive of interest amount: Retailers incorporate the interest amount into the upfront product price. Customers pay a higher initial price but avoid any interest payments on their EMIs.

Weighing the trade-offs

Pros:

• No additional interest charges, making it budget-friendly.
• Convenient financing option for significant purchases.

Cons:

• Hidden charges like processing fees or penalties for prepayment.
• Higher product prices, especially for items with substantial profit margins.
• The temptation to overspend and potentially overextend finances.
• Missing EMI payments can negatively impact your credit score, affecting future loan and credit card eligibility.

Steps for informed decisions

1. Compare offers from different lenders and retailers.
2. Check eligibility criteria, which can vary.
3. Budget appropriately to ensure you can comfortably meet EMIs.
4. Scrutinise terms and conditions for hidden fees.
5. Ensure timely EMI payments to avoid extra charges.
6. Be aware of the cancellation time frame and potential fees.
7. Understand the refund procedure if you need to cancel a no-cost EMI purchase.

"Retailers and financial institutions generate revenue from this arrangement. Therefore, convenience shouldn't be the sole criterion for your choice. Take time to deliberate amongst the available options and make a well-informed decision this Diwali," Arpit Suri, CA and personal finance expert said.