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If you want to buy a LED TV in the next two months, you could save for it, flash your credit card or use the zero-interest option. But if the TV is a Samsung one and your banker is ICICI Bank, you could also use your debit card and pay through equated monthly instalments (EMIs). At 13 per cent a year, the interest rate on reducing balance is substantially lower than a credit card's 36-45 per cent a year, as well as 15-25 per cent for personal loans.
However, you should have a fixed deposit with the bank and only 90 per cent of the deposit amount will be lent to you for a purchase (to buy an LED TV worth Rs 50,000, you should have a fixed deposit of Rs 55,556). Also, currently, the facility is only for Samsung products.
Many banks offer fixed deposit-linked credit cards, allowing people to borrow up to 85 per cent. For instance, the SBI Cash Advantage card provides the same facility, charging 2.25 per cent a month; Axis Bank's Insta Easy Credit card charges 1.95 per cent a month.
Since the fixed deposit will earn interest at nine per cent for 390 days, the effective rate of interest on EMIs is five per cent annualised (13-8 per cent). You will continue to earn interest on the fixed deposit. Also, as interest is on reducing balance, the net outgo will be less every month, says Suresh Sadagopan, founder Ladder7 Financial Advisors.
For a purchase of Rs 50,000 and a fixed deposit of 55,556, you will save Rs 1,687 in 12 months, Rs 1,211 in nine months, Rs 726 in six months and Rs 232 in three months, if you opt to pay through EMIs.
By comparison, if you buy through a credit card and pay in EMIs, ICICI Bank will charge 13 per cent for a year and 15 per cent for 18-24 months on reducing balance. If one doesn't repay on time, a penalty is charged.
If you have the cash, the easiest route to such purchases is breaking the fixed deposit, though there will be a penalty of 50-100 bps. "It is useful if you have been saving for a specific goal, but want to make a purchase for which you don't have sufficient cash. This way, you don't have to break the fixed deposit you have earmarked," Sadagopan says.
This is akin to the overdraft facility many banks offer against fixed deposits, though in the overdraft case, you have to pay regularly; else, the interest will add up. The EMI on debit card scores due to convenience, Sadagopan says. In case of overdraft, banks extend 80-90 per cent against the fixed deposit amount and charge one-two per cent more than the fixed deposit rate.
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