Equated Monthly Instalment (EMI) schemes are very popular in India for electronic appliances, mobiles, laptops and other gadgets. On the face of it, this scheme looks very attractive and easy on your purse. But there is no such thing as a free lunch. Let’s look at the extra costs you are likely to pay when you opt for an EMI scheme and what you should evaluate before you opt for such a scheme.
Costs to be borne
Raj opted to purchase his mobile phone worth Rs 40,000 through an EMI scheme offered by the retailer, which was in tie-up with his credit card company. The EMI was for 6 months, which should have technically worked out to a down payment of Rs 4,000 and 6 EMIs of Rs 6,000 each. But Raj discovered that he had to pay a down payment of Rs 4,000 and 6 EMIs of Rs 6,833 each. That is, he would have ended up paying Rs 5,000 more on the product if he had opted for the EMI scheme. This is because most EMI schemes come with a hidden cost, which is the interest you will have to pay.
Apart from the interest cost, most credit card companies charge a processing fee when you opt for an EMI scheme. This is a percentage on the transaction amount and varies from bank to bank. Besides, you will not be able to avail discounts which may be available on normal purchases. Also, the EMI amount will get reflected on your monthly credit card bills along with your other dues.
So when you fail to make the payment of your credit card dues in a month, you will be charged the normal interest of anywhere between 24 per cent and 36 per cent for non-payment along with the late payment fee and taxes. The EMI amount, in addition to being subject to these charges will also carry the basic interest cost thus causing a double whammy. Finally, if you purchase a product on an EMI scheme offered by your credit card company, it is most likely that there will be a pre-closure penalty. This means that if you have the cash to pay off the entire amount before the completion of the total number of EMIs, you will have to pay a pre-closure charge, which is usually 2.5-3 per cent of the outstanding principal amount.
As you can see, even though an EMI option may be light on your pocket, there are several costs attached to it. You must therefore evaluate the offer on the table before you opt for it. As a first step, remember to read the fine print thoroughly, as card companies can change terms at their discretion. You must also check if the total payment you are making, including all the EMIs and the down payment is equal to the MRP of the product or if it is more than the quoted price. If it is more, then it means you are being charged interest and/or processing fees for the option.
Check all options
You must then check all options for the product in other stores - both online and offline, and see if you can get the product at a better price if you do not opt for EMI. If the difference is substantial, it is better to opt out of EMI.
Remember to consider the likely costs such as pre-closure penalty when you evaluate the EMI option, as there are a few credit cards which offer zero pre-closure charges. This is because you should have the flexibility to close the scheme when you have excess cash. Also remember to consider how the existing credit limit on your card will change because of opting for the EMI scheme. When you use EMI on credit cards, your existing credit limit comes down to the extent of the outstanding amount.
Although a good EMI scheme is easy on your wallet, you must try to avoid it as the first option. You may not only be spending more than the actual worth of the product, but also splurging first and then relying on EMI payments. This is not healthy for your finances.
(The writer is CEO, BankBazaar.com )