What is No-Cost EMI?

The ‘no-cost EMI' scheme is quickly becoming a popular way for shoppers to purchase expensive items that would otherwise be out of their price range. Flipkart pioneered the no-cost EMI financing scheme, which was later adopted by other e-commerce sites. This financing scheme enables buyers to purchase high-value items online via EMIs, reducing the burden of paying a large sum upfront.

When you sign up for a regular EMI plan, you agree to pay the price of a product in equal installments over a set number of months. The majority of EMI options charge a high-interest rate. As a result, you will have to pay more for a product in the long run. A no-cost EMI, on the other hand, does not charge an interest fee.

Purchases of expensive goods and services through a no-cost EMI plan are convenient as it allows individuals to purchase products that are expensive without having to pay for it all at once. Even if you have a credit card with a low credit score, you can use it to make purchases with a no-cost EMI credit card.

Is No-Cost EMI Interest-free?

A no-cost EMI is a payment plan that allows you to pay for a product or service in affordable monthly installments with no interest. This means you are only paying the total price of the product, with no additional fees.

When we hear the phrase ‘no-cost EMI,' the first thing that comes to mind is that it is interest-free. The reality is, however, that it is not. Interest is paid on no-cost EMIs. The Reserve Bank of India (RBI) issued a circular in 2013 stating that the concept of zero percent interest is invalid. This indicates that banks cannot provide interest-free loans. So, how do offline and online merchants offer this scheme?

How does this No-Cost EMI Scheme Work?

The no-cost EMI scheme works in two scenarios:

  • Discount offered is equal to the interest rate

This is the most common way for retailers to provide no-cost EMI where the applicable interest rate is offered as a product discount.

For example, let us assume you want to buy a phone for Rs. 30,000. If you have a 3-month EMI plan and the interest rate is 15%, you are entitled to pay Rs. 4,500 in interest. However, in the case of a no-cost EMI scheme, you must forego the discount and pay the full price of the smartphone in EMIs. This means that if you pay for the phone upfront, you will receive a discount of Rs. 4,500, resulting in a smartphone purchase at a discounted price of Rs. 25,500. If you choose the no-cost EMI scheme, you must pay the full price of 30,000, which is divided into EMIs. A portion of this amount is paid to the retailer, and the remainder is paid to the finance company.

  • Product’s cost is inclusive of the interest amount

In a scenario like this, the final rate that the customer pays already includes the applicable interest amount.

For example, let us assume that you want to spend Rs. 15,000 on a product. This product is available through a no-cost EMI scheme for Rs. 17,250. In this case, a total of Rs. 2,250 in interest (at a rate of 15%) is added to the product price, which is payable in EMIs over a set period. The interest amount is sometimes also covered as processing fees.

How Does No-Cost EMI Benefit You?

Here are just a few of the many advantages you can get if you use a no-cost EMI plan for your next purchase:

  • You are not required to pay any interest charges, extra costs, or down payments.
  • No-cost EMI plans are available on all major sites and platforms such as Amazon, Flipkart, Myntra, Makemytrip, Upgrad, Curefit, etc.
  • You can use this scheme regardless of which bank account you have or whether you have a credit card or a debit card.
  • You can fund most of your personal needs like birthday celebrations, marriage, college fee payments, gifts for your loved ones, and more.
  • No-cost EMI plans can be used for exchange offers.

How Can You Use a Credit Card for No-Cost EMI?

There are three parties involved in no-cost EMI - the merchant, the bank, and you.

Suppose you decide to buy a smartphone with a no-interest EMI plan using your credit card. The cost of the product will be deducted from your credit card credit limit. Your credit limit will be gradually restored with each EMI payment you make.

Let us understand this with an example. Let us assume you have a credit card with a limit of Rs. 2 lakh and you use it to purchase a product worth Rs. 72,000. Your credit limit will be reduced to Rs. 1,28,000 after the purchase. If you choose a six-month EMI of Rs. 12,000, your credit limit will increase by that amount with each payment to your credit card. This means that by the end of six months, your entire credit limit of Rs. 2 lakh will get restored.

How a Regular EMI Scheme Differs from a No-Cost EMI Scheme

The main difference between the two is that when you choose to pay for a product with regular EMIs, your EMI amount includes both the interest component and the processing fees. When you select a no-cost EMI plan, you can convert the cost of your product into interest-free EMIs. Simply put, a regular EMI equals the amount of the product plus interest, whereas a no-cost EMI equals only the amount.

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