No cost EMIs galore this festive season: Are there any hidden charges?

Now that the festive shopping season has begun, several e-tailers are offering customers the option to purchase goods online at zero cost-EMI- instead of paying for it now, you just pay for it over six months.

The no-cost EMI offers allow consumers to buy different products in instalments without paying additional interest or charges.  This implies that you will be paying only the actual price of the product, just divided into EMIs.

Several banks offer no-cost EMI facilities in different options. Some lenders also provide zero-down payment plans on certain products where you do not need to pay any amount upfront and can easily make monthly instalments, while some few  require a minimal amount as a down payment, and the balance amount is to be paid in EMIs.

"No-cost EMIs do not include interest rate or processing fee. Unlike regular EMI payments where interest and processing charges are added, in case of no-cost EMIs, the total EMI amount payable over the tenure is equivalent to the product’s price. The interest charge is either borne by the seller or the merchant, leaving no interest burden on the consumer. At times, the interest or processing charges are also adjusted in the form of a discount or cashback, to ultimately make the total EMI value equivalent to the product’s actual price," said Rohit Chhibbar, Head of Credit Cards, Paisabazaar.

Paisabazaar explains with the following example:

No-cost EMI offers are generally extended for a tenure of 3, 6 or 9 months, as per merchant and issuer agreements. These may vary from time to time, and across issuers, products and merchants.

To get a better understanding, let us assume that you make a purchase of Rs 10,990 on Amazon, the EMI schedule for a 3-month tenure will be as follows in the case of regular EMIs,  no-cost EMIs, and no-cost EMIs with adjusted interest rate.

"A no-cost EMI is This type of EMI is designed to appear "interest-free" to the consumer. It means that you won't be charged interest on the loan. The interest component is absorbed typically by the seller, who offers the product at a discount to compensate for the interest. The benefit is that you pay the exact purchase price in instalments, without any added interest," said Adhil Shetty, CEO of Bankbazaar.

However, there is no free lunch! Several lenders charge a processing fee for the no-cost EMI. This allows the bank to charge the interest as a processing fee. Moreover,  while opting for a no-cost EMI, you do not get the discount offered on that product, which you could have otherwise availed of. For example, if a product is offered at a discounted rate to all customers, to the no-cost EMI seeker, it will be available at its regular price.

In 2013, the Reserve Bank of India (RBI)  issued notifications, calling out the  no-cost EMI scheme. Its 2013 circular clarifies that zero percent interest or no-cost EMI is virtually non-existent. 

"In the zero percent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to customer in the form of processing fee. Similarly, some banks were loading the expenses incurred in sourcing the loan (viz DSA commission) in the applicable RoI charged on the product. Since the very concept of zero percent interest is non-existent and fair practice demands that the processing charge and RoI charged should be kept uniform product/segment wise, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting the vulnerable customers. The only factor that can justify differential RoI for the same product, tenor being the same, is the risk rating of the customer, which may not be applicable in case of retail products where the RoI is generally kept flat and is indifferent to the customer risk profile," the RBI had said.

Sakeerthi S is an Assistant Professor at ISME, Bangalore, believes these offers are just a marketing gimmick developed by the sellers and the financial institution that ties up with them. Zero-cost EMIs are never about “no costs”, but it’s always about “no visible costs”. It works in two ways:

Discount = interest

Selling Price = Actual Price + Interest Cost

In the first method of discount interest, the online shopping customers forgo the discounts that they are otherwise eligible to avail to pay off the interest costs while in the second method, where the selling price= actual price + Processing fee to cover up the interest cost, the product is not shown as discounted and hence, the interest amount is added to the price of the product.

For example,  you want to buy a smartphone worth Rs 30,000 during the current Amazon sale. If you decide to choose a three-month  EMI plan where the interest charged is 15 percent, you will have to shell out Rs 4,500 as the interest amount. But if you pay the entire amount upfront, you can buy it for Rs 25,500. But if you choose to pay through no-cost EMI, you have to pay the full price i.e. Rs 30,000. In this case, the interest amount is paid to the financier bank and the rest of the amount to the retailer.

Experts on condition of anonymity told Business Standard that in no-cost EMI schemes, the interest amount is bundled in the product’s price. So, even though the No-cost EMI is an attractive scheme, the bank may charge you a processing fee of up to Rs. 500, which is not mentioned in the offer and may not be known to you either. Remember that a “no-cost” EMI loan is still a loan, and needs to be treated in terms of its impact on your credit score.