The Actual Cost of No-cost EMIs

“There are no free lunches in the market”
The quote says it all! Doesn't it feel odd when we see the phrase "NO COST EMI"? Is something like this really possible? Why would someone distribute free money in the market like this? Eh? take a deep breath because soon you are going to find out the hidden truth. Let us dig deeper into this topic.

Well, you might be very sceptical about this anyway, right? Nobody is a fool to give you money for free, and trust me, and you really don't find such kind of people these days. The companies nowadays don't want to leave a single chance to take money out of your pocket then why this act of kindness?

But you must be thinking that you are sure that those giant Bajaj Finance banners said so. Well, let us start from the basics.

What is No-cost EMI?

According to these companies, No cost EMI(equated monthly installment) means that if you have taken a loan of a particular amount against any purchase, you are required to pay no additional interest on the principal amount. In other words, no EMI cost means that zero cost EMI is charged on top of the cost of the product. Hold on! You also believed them for a minute, didn't you?

Well, This is just a marketing gimmick by these companies! So, let us get to the real meaning of the so-called "NO COST EMI".

The hidden cost in No-cost EMI

Such schemes aim to simply allure you to buy more products by getting into the trap of such incentives. The main objective of the scheme is to make you spend more! Let's say you have Rs 10,000 and you are going to buy a new phone that you were waiting for a long time. But wait! You reach the store, and you see the concept of NO COST EMI! Now, obviously, since you don't have to pay all the money at the moment, you will buy the phone costing Rs 15,000 thinking that you won't have to pay any interest on the loan. This is the trick for the companies to increase their sales.

Let's see what the RBI has to say about this. Well, An RBI circular dated September 17, 2013, nullifies the concept of zero percent interest – "In zero percent EMI schemes offered on Credit Card outstandings, the interest element is often camouflaged and passed on to the customer in the form of a processing fee". In 2013, RBI then banned banks from offering a "0% EMI scheme on retail products''. RBI had to take such steps to safeguard the consumers from falling into such traps.

As discussed earlier, No cost EMI is also a marketing gimmick in which, one way or another, the price is borne by the customer only.

How does this scheme work?

There can be two ways in which these schemes work. In the first one, the company will remove the discount that they would have offered you in the first place, i.e. if you have paid the amount upfront. The amount of value goes to the bank or financial institution providing the EMI facility. 

The second way is simply in which the interest cost is added directly to the product's cost. In layman's terms, the price of the product that is shown to you includes the interest amount.

You might be wondering how these schemes work and the whole process through which they fool us? Don't worry, we have got you covered, and now, we will be moving to the most exciting segment, "how these schemes work?" or, in other words, " how do they fool us?".

• Making the discount equivalent to the interest

This is one of the most common methods in which this scheme works. Let us understand this with the help of an example as there are three parties involved, the victim (let’s say Rahul), the retailer (the innocent salesman) and the financial institution.

So, Rahul goes to a retail outlet to buy a phone worth Rs 10,000. The retailer tells him about the new scheme of "No cost EMI". So, usually, the interest charged under a three month EMI plan is 15%, and you would have to pay an interest of Rs 1,500 if you avail the EMI.

But here is how the No cost EMI works, actually:

So, Rahul actually pays the original price of 10,000 in installments, thinking that he does not have to pay any interest. But the truth is... He is paying that 1500 Rs that is the interest on the loan that he will be taking to buy the phone. But the difference is that he does not know the fact that he is paying an interest; he thinks that he is buying the phone at the original price shown to him. The discount amount is taken by the financial institution that is providing the EMI facility, and the leftover amount goes to the retailer. Still, this breakup is not shown to the customer. of course!

Rahul will pay Rs 10,000 to the retailer in three instalments if he has taken that plan. He would have gotten a discount of Rs 1500 if he chose to pay the whole amount up front, then the cost of the mobile phone would be Rs 8500 to him!

• Adding the interest amount to the product price

In this case, the retailers simply add the interest cost to the product. Let's say the phone price is Rs 10,000, and Rahul wants to take an EMI plan for three months, and the interest cost for that will be 1500 as mentioned above. So, the retailer will offer him the mobile phone for Rs 11,500 and offer him the so-called "No cost EMI".

Rahul thinks that the phone's original price is Rs 11,500, but in reality, he is just paying interest of Rs 1,500. He would have to pay only 10,000 if he paid the amount upfront as the retailer would have given him a discount in that case.

The bottom line

So you see "there actually are no free lunches in the market". Nobody will give you their money for free. These things are just marketing gimmicks to increase their sales and fool the customers. But we are here to educate you about the same. And we feel, at least to some extent, we would have been able to make you aware to think logically the next time you go shopping.

So, stay informed & beware of these flimflams!