What is No-Cost EMI and Does it Work to Your Benefit?

The advent of e-commerce along with the ongoing pandemic situation has radically transformed the way we buy things. Today, shopping has ceased to be a seasonal activity and has become a year-round affair, thanks to excellent deals and the convenience offered by e-commerce websites. With constant notifications urging customers to buy at lower prices, purchasing behaviour has shifted to become more impulsive than before.
 
The popularity of no-cost EMI or zero-cost EMI has surged along with the increased adoption of e-commerce methods. Most customers fall for the ‘no-cost’ part of no-cost EMI, assuming that it means they would not have to pay interest on the loan. However, in September 2013, the Reserve Bank of India issued circular prohibiting lenders from selling zero-interest consumer loans and EMIs. So, what exactly does no-cost EMI mean?
 
What is No-Cost EMI? 
 
Customers can use this payment method to buy costly things online and pay for them in monthly instalments instead of paying the entire amount upfront. It implies that when you buy something on a no-cost EMI, the entire EMI that you would have paid on the purchase is deducted from the product's price. Therefore, no-cost EMI means a discount on product or service cost equal to the interest that would have been charged.
 
               Also Read: All You Want To Know About Your EMIs
 
How Does No-Cost EMI Work? 
 
To know how no-cost EMI works, you must first understand the two concepts on which it operates. One popular method is to skip the discount and pay the entire amount to the lending institution to meet the interest cost. Another method is to add the amount of interest to the product's price. To better understand these methodologies, let's go over them one by one. 
 

• Discounts equal interest

This is the most popular way for retailers to offer no-cost EMI. Let’s assume you wish to purchase a laptop that costs Rs 45,000. At a 10 per cent interest rate, you would have to pay Rs 13,500 as interest throughout the three-month EMI plan. However, in no-cost EMI, you are exempted from the discount, and you pay EMI online in the form of the actual price of the laptop. 
 
It means, by making an upfront payment, the laptop would cost just Rs 31,500 since it is available at a discount price. However, if you choose the zero-cost EMI, you will pay Rs 45,000 and not receive the benefit of Rs 13,500 discount, which will be treated as the interest on your loan.
 
In this method, the total amount you pay towards the laptop is split into the amount paid to the retailer and the financial institution (interest portion). 
 

• Interest amount added to the product price

 
Another method of utilising a no-cost EMI is by adding the interest amount to the product's price. Let’s assume, you are purchasing furniture worth Rs 30,000, but the seller convinces you to buy the same on no-cost EMI for Rs 37,500. Here the interest of Rs 7,500 is already added to the cost of the furniture. The same will be paid by you in monthly instalments. The additional amount you are paying may also include the processing fee.  

To calculate the monthly EMI of zero-cost EMI, you should use a no-cost EMI calculator. 
 
               Also Read: What to do in case you can't pay your EMI or loan amount due

Benefits of No-Cost EMI
 

• Improved affordability

 
Purchases such as that for festivities, a wedding or party or buying trendy gadgets and furnishings often put a strain on our budget. The no-cost EMI allows you to purchase more expensive items without having to bear the burden of spending a big amount at one go. To purchase a product or services on zero-cost EMI, you do not require a strong credit history. Therefore, for middle-class customers, the meaning of no-cost EMI is on the same lines as increased affordability. 
 

• Zero-interest cost 

 
When compared to a traditional monthly instalment plan, a no-cost EMI comes with a zero cost of interest. This feature makes our purchasing more simple and affordable. 
 

• Available on multiple platforms

 
To purchase a product on a no-cost EMI, you need not always make an online payment. This EMI method is available with a wide range of online as well as offline retailers. Nowadays, almost every e-commerce platform offers this service. 
 

• Easily available online

 
Traditionally, financial institutions offered no-cost EMIs to consumers who have a credit or debit card, after completing certain paperwork. However, with fintech solutions, anyone with stable financials can purchase a product on a no-cost EMI, wherever applicable. 
 
                              Also Read: EMI Payment Method Offered by Hero FinCorp

Should You Opt for No-Cost EMI? 
 
Now that you understand what is the meaning of no-cost EMI, it is time to figure out how can you benefit from this EMI plan.
 

• If you want to purchase an expensive product that does not fit your budget, zero-cost EMI is the way to go. 

• If you do not want to pay the entire price or do not have sufficient cash to pay upfront, no-cost EMI is the ideal alternative for you.

• You may choose a zero-cost EMI if you are receiving a decent deal by taking advantage of an additional discount.

• If you want to build your credit history by availing of short-term consumer durable loans, opt for zero-interest EMI and pay online your EMIs without defaulting on them. 

 
To Conclude 
 
When choosing a financing option with a no-cost EMI, always consider the down payment and the processing fees, if applicable. This EMI scheme is not available on all products sold by merchants. If you are paying a bike loan EMI, the no-cost EMI will not apply to you. Therefore, before applying for this plan, read the terms and conditions thoroughly.