DNA Explainer: Ahead of festive season, find out the 'real cost' of no-cost EMIs

Festival season is here and consumers are flooded with offers from not just different brands, e-commerce companies but also from banks. Other than the various discounts offered during the festival season, retailers and e-commerce platforms advertise no-cost EMIs to purchase costly products such as laptops, phones, refrigerators and other consumer durables.

This definitely is a lucrative option for buyers who want to possess these items but do not have sufficient money to invest at that time and so no-cost EMIs become a boon for them. This type of EMI is different from the regular EMI option.

However, in this type of payment mode, the customer feels they are buying a product that they cannot afford as an upfront payment but in reality, some interest component and additional charge is built into the price they are paying.

Understanding no-cost EMIs

Purchase a costly item from the market without a down payment, instead pay monthly installments like you pay regular EMIs.

There is no interest charge levied on the customer in case of purchasing a product under the no-cost EMI scheme.

This means you have to pay only the actual cost of the item in installments which is called the EMIs (equated monthly installments).

No-cost EMI is a network between a retailer, bank and customer. All three parties benefit from this scheme and are in a win-win situation.

The customer can purchase high-cost products and pay for them in monthly installments without any additional interest charges.

The bank receives a new source of income and the retailer shares a portion of its margins with the bank.

On the other hand, the retailer gets increased sales in high-cost product categories as everyone gets purchasing power to buy them.

How does it work

Remember that there is always a cost that one has to bear on these 'no-cost EMI' schemes.

Most offline and online retailers tie up with certain financial institutions offering consumer durable loans to buy products.

While these are marketed as 'zero cost loans', the actual interest rate charged is usually very high ranging between 16% to 24%.

The Reserve Bank of India (RBI) in its circular in 2013, said that the concept of zero percent interest is non-existent.

In the zero percent EMI schemes the interest element is often camouflaged and passed on to customers as a processing fee.

The no-cost EMI option scheme offers two options to customers - equating discount to EMI interest and built-in interest.

In this option, the retailer does not provide discounts to a customer and sells the same product for full price with an EMI option.

The discount that they would have offered to you is instead paid to the bank or financial institution to cover the interest cost.

Sometimes retailers build in the interest component into the actual price of the product and take advantage of the flexible payment option.