Want a loan for your shopping spree?

The banks and non-banking finance companies (NBFCs) are latching on to the e-commerce boom. After offering collateral-free loans to sellers on e-commerce platforms, banks have initiated non-credit card driven loans to a select set of customers.

State Bank of India (SBI) has entered into a tie-up with Flipkart to offer its consumers a pre-approved EMI facility on purchases. Earlier, Bajaj Finance entered into a tie-up with Future Group to convert purchases to easy EMI.

The access to credit is getting easier for retail and e-commerce buyers, with several banks doling out cashback and other offers apart from EMI options. Other banks such as ICICI Bank, HDFC Bank, Standard Chartered, HSBC, including SBI have been offering credit or debit-card based equated monthly installment options (EMI).

Rajnish Kumar, managing director, national banking group, SBI said, "The objective is to provide finance to credit worthy individuals through an end-to-end online facility without having to go through the process of applying for a personal loan for simple purchases."

Clubbed with the annual sales at online and brick-and-mortar retail shops, spending patterns would get into a tizzy.

Rajiv Raj, co-founder of CreditVidya says, "Typically, consumers defer the purchase when they don't have the money. The EMI option makes it convenient for the buyer to purchase. Such options are great for e-commerce players to offer value addition to customer experience. For the bank, it is a way to evaluate the credit worthiness of the product based on past transaction history, the ability to purchase, etc."

Though the processing fee is either waived off or borne by the retailer or e-commerce provider, there are other areas that one should understand before signing on the dotted line and opting for loan facility, either through a bank or a non-banking finance company for your retail purchases and consumer durables.

These facilities of converting the purchase to EMI are often available only when the order value crosses a pre-set limit, which is in the range of Rs 4,000 to 10,000. To match the limit, you would sometimes end up making purchases that you wouldn't have otherwise made.

Also, the longer the duration of the loan, the higher is the interest. Most banks offer a 3-12 months EMI option, but not a longer duration. SBI and HSBC Bank don't offer an 18-24 month EMI option. Longer-duration loans charge an additional interest rate, which is 1-2% higher than that for 3-6 month loans.

This interest charged on the EMI option is not in the range of your home or car loans, but matches the rate offered by banks on personal loans, which are highest in the category of loans. SBI has stated that it would charge 14% interest on these pre-approved loans in tie-up with Flipkart. Other banks charge anywhere between 12-16% for credit and debit card purchases to EMI, depending on the duration of the loan. But the actual rate turns out be higher for a borrower due to the way it is charged.

V N Kulkarni, who is an independent banking expert, explains, "The interest rate charged on such loans is usually a flat rate and not a reducing balance rate. Also, these aren't floating rate loans and the interest rates remain fixed even when Reserve Bank of India cuts rates and hence borrowers don't get the benefit of lower EMIs."

When it comes to online purchases, sometimes product returns cannot be ruled out. The provisions on the interest payment in case you return the product need to be studied. Flipkart says, "On return or exchange, interest charged by the bank till that time will not be refunded by Flipkart." The interest charge apart, you would also have to bear the foreclosure charges for loans, if you decide to return the product and hence close the loan.

If you accept the product and stick to the loan, ensure timely payments as though the seamless EMI process the default terms remain the same as other loans. "Consumer loans are small-ticket loans. A default on such loans could have an impact on your credit score just like any other loan. Not repaying these loans on time have the potential to impact a person's credit score and maybe lead to further trouble for seeking higher ticket loans such as a home, car or a personal loan," warns Raj of CreditVidya.

Instead of making outright purchases using the EMI option, it is in the interest of the consumer to first save and then buy. Also, make a list of things you actually need before logging in or heading to retail outlets to ensure you don't end up making unintended purchases, just because a discount is available.

For those looking to shop for events such as wedding and apparel and jewellery, there are now options available to rent designer clothes and fashion jewellery at 0.01% of the actual cost. No one wants to carry the same look to another event in the fear of, being seen in the same outfit at my friend's marriage. So why waste 10% of your monthly income on an outfit that you wouldn't wear as many as 10 times.

Instead of marking malls as your next weekend destination, explore the dam or a riverside surrounded by lush green beauty and tuck into the home-made or pre-packed rolls carried in your picnic basket to relish the good old days and build memories that are worth much more than amount you would have spent at the mall in one single swipe.