With the onset of the festive season, e-commerce platforms and big-ticket retailers are offering zero-cost EMI by partnering with lenders. While it may sound appealing, the amount is blocked against the credit card limit, buyers have to pay processing fees and there’s penalty on prepayments.
The EMI amount forms a part of the minimum due. So, if the bill is not cleared by the due date, interest charges will accrue on the total due as well as new transactions, until the individual clears all dues. Missing an EMI will attract late fees and penal interest, and the delay will be reported to credit bureaus.
In a zero-cost EMI, the interest isn’t waived but absorbed by the manufacturer or dealer through an upfront discountas part of their promotion. For example, if an appliance worth `30,000 carries a 12% annual interest, the manufacturer may adjust the price so your instalments appear interest-free. The bank still earns its interest, the seller benefits from higher sales, and you get the convenience of paying in instalments without an explicit extra charge.
The buyer still has to pay the GST on the interest component. Also, the trade-off is that you miss out on the higher cash discount available on a lump-sum payment offered by the dealer. After adding processing fees and GST on those fees, the cost can rise further. In fact, zero-cost EMI is technically a loan product and any loans without interest are not permitted by the Reserve Bank of India. “The interest component will still reflect in your statement, though already offset with the upfront discount,” Rohit Chhibaar, chief business officer, Credit Cards, Paisabazaar. However, GST on the interest component, albeit usually a small amount, will still be charged to the card account. GST is also applicable on processing fee and other applicable charges.
Credit utilisation
When you purchase a product, the total product cost is blocked against your credit limit. As you pay the monthly EMIs, the limit is gradually released. So, initially you will see a spike in the credit utilisation ratio, especially if your card has a low credit limit.
“If utilisation stays high, usually above 30–40% of the limit, it can weigh on the individual’s credit score,” says Adhil Shetty, CEO, BankBazaar.com. Timely repayment, however, helps build a positive credit record. The key is to track utilisation and ensure every instalment is paid on time.
Processing fees
While zero-cost EMIs make planned purchases more affordable by spreading the cost into multiple instalments spread over three to 12 months, banks levy processing fees. For instance, ICICI Bank applies a processing fee of `199 plus GST, with late payment charges of `500- 750 depending on the outstanding amount. HDFC Bank’s fee varies between `99 and `699 plus GST, depending on the product, merchant, or whether it is a credit card, debit card, or card-less EMI transaction, according to BankBazaar.com.
Zero-cost EMI options do not have longer tenures, so these cannot be rolled over. The buyer must ensure the EMI amount fits his monthly budget and she can pay the dues on time without financial burden. Also, there are no cashbacks or reward points for using the credit card on a zero-cost EMI purchase. So, despite purchasing a high-value product which can typically fetch around 5% cashback or similar reward points to be redeemed later, the buyer will not get any such benefits.
Paying upfront is usually cheaper if you have adequate funds. Otherwise, a no-cost EMI will help manage outflows more comfortably. It will allow the buyer to take advantage of seasonal sales or limited-time offers without stretching your monthly budget. So, while the instalments look easy, factor in these hidden costs before calling it “zero-cost.”