You buy an digital gadget from Amazon or Flipkart. On the cost web page, you may pay upfront or you may go for No-cost EMI out of your financial institution.

**What’s a No-cost EMI?**

As a substitute of paying Rs 30,000 upfront, you pay Rs 5,000 per thirty days 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 identify No-cost EMI.

What deal, isn’t it?

However have you learnt RBI prohibits banks from providing zero curiosity EMI schemes?

If the banks can’t provide loans at 0% p.c, **how do retailers provide such schemes then?**

**Have you learnt the attention-grabbing math behind the No-cost EMI schemes?**

Moreover, you’ll find No-cost EMIs for under 3, 6 or 9 months mortgage tenure? Often 3 or 6 months. **Why not for 12, 18 or 24 months?**

When you perceive the mathematics, you’ll have all of the solutions.

Let’s discover out.

**Observe:** I additionally wrote a Twitter thread on how No-cost EMIs. Should you use Twitter, you may try the **Twitter thread **right here. Should you just like the content material, do like/retweet/share.

## How do No-cost EMIs work?

Let’s rapidly test 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 will likely be handed on to you as an upfront low cost on the time of your buy, successfully supplying you with the good thing about a No Price EMI. This low cost excludes GST on curiosity quantity that will likely be charged by your financial institution.*

**Flipkart** additionally explains in an analogous approach by an instance.

Let’s see what this implies.

- Let’s assume the merchandise prices Rs 30,000.
- Should you go for 6-month No-cost EMI, you’ll have to pay an EMI of Rs 30,000/6 = Rs 5,000 per thirty days
- The financial institution prices 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 leads to an EMI of Rs 5,000 per thirty days. 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.
- Should you work the numbers, a mortgage of Rs 28,730 at 15% p.a. for six months can have an EMI of Rs 5,000 per thirty days.
- A number of days later, the financial institution will convert buy quantity (X) into EMIs. 5,000 per thirty days 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 may see No-cost EMI choices for 3-month and 6 month EMI. **For longer tenure reimbursement, the no-cost EMI choice 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 may see, for the opposite EMI schemes, the speed of curiosity is 15% p.a. It’s honest to imagine R=15% p.a.

For the three months No-cost EMI, you pay Rs 34,000 per thirty days. That makes it 1,02,000. You don’t pay something additional. 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 per thirty days for six months.

## The place is the upfront low cost?

As we’ve mentioned earlier than, banks can’t provide any mortgage with out curiosity.

It’s one other matter if you don’t return the principal. 😊 Every thing needs to be proper on paper.

Coming again to the subject, we have to determine the quantity X, that will end in EMI of Rs 17,000 per thirty days for six months at an rate of interest of 15% p.a.

You may merely use PV operate on excel to seek out that out. You can too check out Mortgage calculator to determine the identical.

Y = PV(15%/12,6,17000,0,0) = Rs 97,682

Your bank card will likely be charged Rs 97,682.

Subsequently, 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.**

*Should you had an choice 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 will likely 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 Fee = 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 supply 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 fee (low cost quantity) to the service provider goes up if the reimbursement 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 reimbursement tenures. Often 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 proud of).

Everybody wins.

The client will get the product in straightforward 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 cost.

As you may see, you might be paying one thing additional each month as a result 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 full additional cost as a result of GST over the mortgage tenure will likely 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%.

**Subsequently, not likely a Zero value EMI for you.**

## Don’t neglect the processing price

A number of banks cost a processing price on EMI transactions, together with No-cost EMI transactions.

Such processing price may very well be a % of your buy quantity or a set price (no matter mortgage quantity).

For example, ICICI and HDFC Financial institution cost Rs 199 + GST.

Your financial institution might have a special coverage. Please test together with your financial institution.

**Processing price provides to the price of borrowing.** Moreover, a set price can even sharply enhance the fee for smaller loans.

As we’ve seen above, No-cost EMIs are quick time period loans. Subsequently, the influence of processing price is unfold over a really quick interval.

Let’s return to the instance mentioned (Price =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 price of Rs 199 + GST will increase the fee from 2.6% to five.3% p.a.**

**Now, the influence will likely be larger for shorter length loans.**

If the mortgage tenure is 3 months, the efficient value is 7.3% p.a.

**Furthermore, the influence will likely be larger for smaller loans.**

For example, the efficient value of No-cost EMI for Rs 10,000 mortgage (Price =10,000, Rate of interest =15%, Tenure = 6 months, Processing price = 199 + GST) will likely be 16.8% p.a. That’s the sort of influence processing price can have on quick time period loans. That is worse than a 12% mortgage accessible at 0% processing price.

**Observe**: The processing price isn’t all the time disclosed on the platform (Amazon/Flipkart). The onus is on you to test 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, **in the event you purchase on EMIs, together with No-cost EMIs, you don’t get any cashback.**

The identical occurs in the event you purchase on EMIs utilizing Flipkart Axis Financial institution bank card.

Now, these misplaced cashbacks are a chance value in the event you 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 mean you can buy gadgets on EMIs with none extra value. Or a really small value.

Tough 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 influence of processing price and the potential misplaced cashbacks/rewards earlier than you choose.

**A caveat**: Whereas No-cost EMIs enhance your affordability, each mortgage should be repaid. No-cost EMIs should not 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.*