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You buy an digital gadget from Amazon or Flipkart. On the fee web page, you’ll be able to pay upfront or you’ll be able to go for No-cost EMI out of your financial institution.
What’s a No-cost EMI?
As an alternative of paying Rs 30,000 upfront, you pay Rs 5,000 monthly for the subsequent 6 months. You continue to pay Rs 30,000 however you get to pay the quantity over 6 months (as a substitute of upfront). No value for you. Therefore, the title No-cost EMI.
What an excellent deal, isn’t it?
However are you aware RBI prohibits banks from providing zero curiosity EMI schemes?
If the banks can’t supply loans at 0% %, how do retailers supply such schemes then?
Are you aware the fascinating math behind the No-cost EMI schemes?
Moreover, you can find No-cost EMIs for under 3, 6 or 9 months mortgage tenure? Normally 3 or 6 months. Why not for 12, 18 or 24 months?
When you perceive the mathematics, you should have all of the solutions.
Let’s discover out.
Be aware: I additionally wrote a Twitter thread on how No-cost EMIs. For those who use Twitter, you’ll be able to try the Twitter thread right here. For those who just like the content material, do like/retweet/share.
How do No-cost EMIs work?
Let’s shortly examine how Amazon and Flipkart clarify this.
Right here is an excerpt from Amazon web site with respect to No-cost EMI schemes.
Amazon
The financial institution will proceed to cost curiosity on EMI as per present charges. Nonetheless, the curiosity to be charged by the financial institution might be handed on to you as an upfront low cost on the time of your buy, successfully supplying you with the advantage of a No Value EMI. This low cost excludes GST on curiosity quantity that might be charged by your financial institution.
Flipkart additionally explains in an analogous method by way of an instance.
Let’s see what this implies.
- Let’s assume the merchandise prices Rs 30,000.
- For those who go for 6-month No-cost EMI, you’ll have to pay an EMI of Rs 30,000/6 = Rs 5,000 monthly
- The financial institution expenses rate of interest of 15% p.a. for a 6 month mortgage.
- Now, discover X such {that a} mortgage of X at 15% p.a. for six months ends in an EMI of Rs 5,000 monthly. Use PV method in excel to seek out X.
- X = Rs 28,730
- Supply upfront low cost of Rs 30,000 – Rs 28, 730 = Rs 1,270. The service provider bears the low cost.
- Your Bank card is charged Rs X or Rs 28,730. That’s decrease than the listed worth of Rs 30,000.
- For those who work the numbers, a mortgage of Rs 28,730 at 15% p.a. for six months could have an EMI of Rs 5,000 monthly.
- A couple of days later, the financial institution will convert buy quantity (X) into EMIs. 5,000 monthly for six months.
- You’ll have to pay GST on the curiosity quantity. Now, the GST paid is an additional value to you.
Let’s attempt to perceive with the assistance of one other instance .
The price of the product is Rs 1,01,999.
You possibly can see No-cost EMI choices for 3-month and 6 month EMI. For longer tenure compensation, the no-cost EMI possibility just isn’t accessible. We’ll see later why that’s the case.
The speed of curiosity can’t be zero as a result of that’s not acceptable to the RBI. As you’ll be able to see, for the opposite EMI schemes, the speed of curiosity is 15% p.a. It’s truthful to imagine R=15% p.a.
For the three months No-cost EMI, you pay Rs 34,000 monthly. That makes it 1,02,000. You don’t pay something further. The distinction of Rs 1 is to rounding off.
Ditto for 6-month No-cost EMI. 17,000 X 6 = 1,02,000.
So, if you buy the merchandise for 1,02,000, you’ll have to pay Rs 17,000 monthly for six months.
The place is the upfront low cost?
As we’ve mentioned earlier than, banks can’t supply any mortgage with out curiosity.
It’s one other matter if you don’t return the principal. 😊 Every little thing must be proper on paper.
Coming again to the subject, we have to work out the quantity X, that will end in EMI of Rs 17,000 monthly for six months at an rate of interest of 15% p.a.
You possibly can merely use PV perform on excel to seek out that out. You too can check out Mortgage calculator to determine the identical.
Y = PV(15%/12,6,17000,0,0) = Rs 97,682
Your bank card might be charged Rs 97,682.
Due to this fact, the low cost (D) turns into 1,01,999 – 97, 682 = Rs 4,318
This low cost is borne by the service provider/retailer/model/vendor.
Had you opted for 3 month No-cost EMI, your bank card would have been charged Rs 99,502. The upfront low cost would have been Rs 2,497.
For those who had an possibility of going for 9 month No-cost EMI, the upfront low cost would have been Rs 6,093. For a 12 month No-cost EMI, the upfront low cost might be Rs 7,825.
The upfront goes up with the mortgage tenure.
Let’s think about this with one other instance.
Listed worth (value) =Rs 30,000, Curiosity Price = 15% p.a.
- 3 months No-cost EMI. X = Rs 29,265. Low cost = Rs 735
- 6 months No-cost EMI. X = Rs 28,730. Low cost = Rs 1,270
- 9 months No-cost EMI. X = Rs 28,208. Low cost = Rs 1,792
- 12 months No-cost EMI. X = Rs 27,698. Low cost = Rs 2,302
- 18 months No-cost EMI. X = Rs 26,716. Low cost = Rs 3,284
- 24 months No-cost EMI. X = Rs 25,780. Low cost = Rs 4,220
The low cost to offer you the expertise of No-cost EMI will increase as you enhance the mortgage tenure.
Because the low cost is borne by the vendor/retailer/model, the associated fee (low cost quantity) to the service provider goes up if the compensation tenure is longer. And the service provider can bear solely a lot low cost.
That’s the reason No-cost EMI schemes are restricted to shorter compensation tenures. Normally 3 to six months.
The scheme is No value for you. Nonetheless, it isn’t Zero curiosity for the financial institution (which RBI wouldn’t be pleased with).
Everybody wins.
The shopper will get the product in simple zero-cost installments.
The financial institution will get the mortgage and avoids regulatory glare. The scheme is No value for you. Nonetheless, it isn’t zero rate of interest for the financial institution.
The service provider, regardless of the low cost hit, will get enterprise.
Is the No value EMI scheme actually No-cost?
Not likely. GST performs spoilsport.
GST is charged on the curiosity portion of the EMI.
Let’s see the way it impacts your fee.
As you’ll be able to see, you’re paying one thing further each month on account of GST on the curiosity value.
Within the first month, you pay Rs 5,065 (as a substitute of Rs 5,000). That is due to 18% GST on curiosity quantity of Rs 359.
359*18% = Rs 65
The entire further fee on account of GST over the mortgage tenure might be Rs 229 i.e. you’ll pay Rs 30,229 (as a substitute of Rs 30,000).
This pushes the price of mortgage from 0% to 2.6% p.a.
In absence of GST, the efficient value of the mortgage would have been 0%.
Due to this fact, not likely a Zero value EMI for you.
Don’t neglect the processing payment
A couple of banks cost a processing payment on EMI transactions, together with No-cost EMI transactions.
Such processing payment may very well be a % of your buy quantity or a hard and fast payment (no matter mortgage quantity).
As an illustration, ICICI and HDFC Financial institution cost Rs 199 + GST.
Your financial institution might have a special coverage. Please examine together with your financial institution.
Processing payment provides to the price of borrowing. Moreover, a hard and fast payment also can sharply enhance the associated fee for smaller loans.
As we’ve seen above, No-cost EMIs are quick time period loans. Due to this fact, the affect of processing payment is unfold over a really quick interval.
Let’s return to the instance mentioned (Value =30,000, Rate of interest = 15% p.a., Mortgage Tenure = 6 months).
GST elevated the price of mortgage from 0% to 2.6% p.a.
Processing payment of Rs 199 + GST will increase the associated fee from 2.6% to five.3% p.a.
Now, the affect might be increased for shorter period loans.
If the mortgage tenure is 3 months, the efficient value is 7.3% p.a.
Furthermore, the affect might be increased for smaller loans.
As an illustration, the efficient value of No-cost EMI for Rs 10,000 mortgage (Value =10,000, Rate of interest =15%, Tenure = 6 months, Processing payment = 199 + GST) might be 16.8% p.a. That’s the form of affect processing payment can have on quick time period loans. That is worse than a 12% mortgage accessible at 0% processing payment.
Be aware: The processing payment just isn’t at all times disclosed on the platform (Amazon/Flipkart). The onus is on you to examine with the financial institution.
Don’t ignore Misplaced cashbacks and rewards
ICICI AmazonPay Credit score Card gives 5% cashback to Prime customers (3% to Non-prime customers) on each buy on Amazon. Nonetheless, for those who purchase on EMIs, together with No-cost EMIs, you don’t get any cashback.
The identical occurs for those who purchase on EMIs utilizing Flipkart Axis Financial institution bank card.
Now, these misplaced cashbacks are a chance value for those who go for no-cost EMIs.
Do think about these prices earlier than buying on No-cost EMIs.
Are No-cost EMI schemes good?
No-cost EMI schemes help you buy objects on EMIs with none extra value. Or a really small value.
Troublesome to seek out flaws with loans with efficient value of 0% or say lower than 5% p.a.
Whole lot.
Nonetheless, do think about the affect of processing payment and the potential misplaced cashbacks/rewards earlier than you decide.
A caveat: Whereas No-cost EMIs enhance your affordability, each mortgage have to be repaid. No-cost EMIs will not be a license to overspend. Don’t overborrow. Overborrowing or reckless credit score behaviour can get you into critical hassle.
Picture Credit score: Pixabay.com
The publish was first printed in August 2018 and has been up to date since.
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