Boon Or Bane? Decoding The Reality Of Zero-Cost EMIs

The no-cost EMI scheme benefits all stakeholders—the merchant, lender and the customer

- Shipra Singh

Fancy the new smartphone launched recently that you want to own but cannot afford? No problem. Buy it now and pay for it over 3-8 months. This must be a loan, you may think. Well, that is true but there's no interest to be paid. So, essentially, you are buying the phone on an interest-free loan. That's no-cost EMI (equated monthly instalment) for you, ubiquitously being offered on most purchases, both online and offline. Even school fees can now be funded through such no-cost EMI schemes.

A no-cost EMI works like a regular loan where the bank or lender charges an interest. But, the interest is not passed on to the customer. It is rather borne by the merchant selling the product. The total interest on the loan is given as an upfront discount to the customer at the time of purchase, which makes the purchase cost of the item the net amount that the customer has to pay.

The cost in no-cost EMI

When you make monthly instalments, the interest component is built into it along with the principal to ensure that the full cost is recovered. This is where this financing scheme gets interesting. No-cost EMIs are typically offered through credit cards. Interest payments on credit cards carry 18% GST. So, your monthly instalments are not made up of just principal and interest but also carry 18% GST charged on the interest component built into the instalment.