Should You Go for No-Cost EMI This Festive Season?

It's that time of the year where retailers are gearing up to make the most of it. The Grand Indian Festive Season. And a part of their marketing strategy is using "No-cost EMI". While it may entice you as a customer to opt for No-Cost EMI to make your high-value purchase this festive season, there are quite a few things that you need to know, so as to not venture into the unknown. Let's look at these in today's pill

A No-cost EMI (Equated Monthly Installment) is essentially your product price divided by the number of months in which the amount will be repaid. This has some great benefits to all the three-party involved, i.e. Customer, Seller & Bank. While as a customer you now have the power to buy that product which you won't be able to afford in one shot payment, the bank receives a new source of income in the form of interest (yes there is an interest in No-cost EMI) and seller by sharing a portion of its margin gets more sales on those high-value products. Now that you have got a gist of what and how this ecosystem of No-cost EMI works, let's look at the two ways a seller provides No-cost EMI with examples.

1) Equating discount to interest on EMI
For the sake of simplicity, let's say you want to buy a smartphone whose Selling price is Rs.35000. Now if you were to buy this smartphone with upfront money, you get a discount of 10%, effectively bringing the price to Rs. 31500 (Rs.35000 - Rs.3500). But in the case of a No-cost EMI offer, let's say, again for the sake of simplicity the interest amount is Rs. 3500 as charged by the bank. So now the seller will equate this with the discount which was earlier being offered. But you as a customer will lose the discount if you opt for this. As you saw in this case, the customer got the benefit of buying the high-value product, the seller got the sales and the bank gets new income as interest.

2) Interest Built-In the price of the product
Taking the same example as above, the seller will now include the interest in the price of the product itself. So effectively, it will display the product price as Rs. 38500. Although this scheme is not used widely, you as a customer bear the interest under the tag of 'No-cost EMI'.

The above examples although covers most of the pros and cons of a No-cost EMI here are some more to be noted :

1) Helps customers in managing Cash flow to keep aside money for other emergency use while still able to buy the product.
2) As explained by us in this article how important it is to have a credit buying history, opting for such a small to medium ticket loan helps you in availing of those big-ticket loans such as a Car or Home loan.

1) Not all retailers offer such schemes
2) Sometimes only available to credit holders
3) If you default on payment it may affect your Credit Score and may cost much more than the actual cost of the product
4) Reading the terms and conditions is very important.

If you are still scratching your head on whether to Opt for a No-Cost EMI or skip it, just remember if you can afford to pay the upfront price of the product while keeping aside for other expenses, go ahead and pay it. On contrary, if you can't, you should opt for this option however beware of the terms and conditions and only go with it if you can afford to pay the EMI.

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The above information is to spread financial literacy. We are not SEBI registered financial advisors, kindly consult your financial advisor before making any investment decision.

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