How does No Cost EMI work?

Is no cost EMI a good option?

Scenario 1

You want to purchase a couple of desks, chairs and other office furniture for your small business.
But, right now, you are running low on funds, and it’s difficult to pay for it from your meager working capital.
Is there some way that you could purchase the furniture now and pay for it later in small instalments?

Scenario 2

You’re a retailer who sells big-ticket items like furniture, expensive gadgets, or home appliances.
You have potential customers who would like to purchase your products on EMI.
Is there some way for you to offer an easy instalment facility to your customers?

No-cost EMIs are an excellent solution for both scenarios.
In this article, we walk you through all that you need to know about no-cost EMIs – how it works, benefits for small business owners, and much more.
Continue reading to decide if this popular finance scheme is the right choice for your business.

What Is No-Cost EMI?

It’s a popular finance scheme for gadgets, home durables, furniture, travel, and other big-ticket purchases.
Under this scheme, the borrower repays the cost of the product in EMIs spread over the agreed repayment term.
To give a numerical example, let’s state that you purchase a laptop costing Rs. 30,000.
Instead of paying for the gadget at the time of purchase, you agree to pay it in six Rs.5000 instalments.
Bajaj Finserv, Amazon Pay Later, ZestMoney, Flipkart Axis Bank no-cost EMI are some of the popular options available in the market.
This easy finance scheme has emerged as a popular choice for shoppers who cannot afford big-ticket purchases.
It makes it easy for customers to “purchase a high-value item now and pay for it later.”
The primary reason why no-cost EMI has captivated customers is that it’s highly convenient and hassle-free.
You can opt for it while checking out your shopping cart, just like you would use other payment methods like credit/debit cards, internet banking, etc.

How Does No-Cost EMI Work?

In a no-cost EMI agreement, there are three parties involved:

1. The Retailer – who sells the product

2. The Lender – who extends the product loan

3. The End Consumer – who purchases the product

The consumer purchases the product from the retailer using no-cost EMI. The retailer has a tie-up with a particular lender.
Every time a consumer purchases from the retailer on no-cost EMI, the lender agrees to foot the bill and guarantees a loan to the customers.
The consumer agrees to pay the lender in equal instalments spread over a fixed period.
As the consumer pays each EMI amount, the lender passes it to the retailer.
The lender recovers the cost of the loan by charging a small interest plus a processing fee, which is included in the initial cost of the product.
Since the interest is not mentioned explicitly and is included in the listing price of the product, this scheme is commonly referred to as no-cost EMI.
Generally, most online merchants require customers to have a credit card to be eligible for no-cost EMIs.
When the customer purchases the product using this option, the total cost is deducted from the customer’s credit card limit.
With every EMI the customer pays, the corresponding amount is restored in their credit limit.
Here’s an example to help you understand it easily.
Let’s say you have a credit card with a credit limit of 1 lakh rupees.
You use the card to purchase a printer for the office worth Rs.30,000 on no-cost EMI.
After the purchase, your credit limit will reduce to Rs.70,000. But, you don’t have to pay the amount immediately.
You choose a six-month EMI of Rs.5,000 each month.
As you pay the EMIs every month, Rs.5,000 is added to your credit limit, and by the end of six months, your entire credit limit of 1 lakh rupees will be restored.

Benefits of No-Cost EMI Payments for Small Businesses

No-cost EMIs is a double advantage for small businesses.
As a consumer, you can use this option to purchase big-ticket items for your business without having to pay for them immediately.
It’s easy to opt for and does not require lengthy documentation processes like traditional equipment/business loans.
You can opt for it while checking out, and the process takes just a few minutes.
It’s cheaper than taking out a business loan to purchase machinery or equipment.
As a business owner, offering no-cost EMI to your customers is a great way to increase sales and bring in new customers.
It helps widen your customer base, by including customers who would not have been able to pay for your products out of pocket.
It can also help in promoting sales of products that are slow-moving.
Generally, most businesses offer no-cost EMI as an incentive to drive sales volumes of less popular products.

No-Cost EMI Doesn’t Mean Zero Interest

When we hear the term “no-cost EMI,” it’s common to assume that it comes with zero interest.
But, the fact is that no-cost EMI is a type of loan and just like all loans, it comes with an interest component.
The only difference is that the interest is hidden within the EMI and is not mentioned upfront to the end-customer.
We can hear you wondering, “in that case, how can I benefit if I offer this option to my customers?
Should I bear the interest component?” Well, no. Here’s how it works.

How Are Online Merchants and Retailers Able to Offer No-Cost EMI?

Online merchants and retailers make no-cost EMIs profitable for them by withdrawing the discounts offered.
Let’s understand this with an example. Let’s say you want to purchase a laptop that costs Rs.60,000.
Suppose you check out using your credit/debit card, net banking, or other regular payment methods.
In that case, the retailer offers you an instant discount of Rs. 6000 bringing the price of the laptop down to Rs. 54,000.
However, when you check out using the no-cost EMI option, you have to forego this discount and pay the full retail price.
Let’s say you opt for the no-cost EMI payment option for 3 months.
The interest rate applied is 10%, which is Rs.6000.
This interest amount is also included in the cost, and you have to repay it in six instalments of Rs.10,000 each over the next six months.

Costs	Regular Payment Methods	No-Cost EMI
MRP of the Laptop	Rs. 60,000	Rs. 60,000
Discount Offered	Rs. 6000	NIL
Final Price the Customer Pays	Rs. 54,000	Rs. 60,000

As you can see from this table, the customer pays more while using the no-cost EMI option.
However, since the product’s final price is the same as the initial price listed, customers assume that they are not paying extra when they opt for no-cost EMI.
They fail to understand that they miss out on discounts, which they could have got if they had paid for it out of pocket.
Alternatively, merchants sometimes add the cost of the interest to the price of the product.
So, if the laptop’s landing cost is Rs. 54,000, they list it as Rs. 60,000.
The interest of Rs.6000 is added to the product price before it gets listed on the site.
Thus, the customer assumes that they are purchasing the product for the same cost using no-cost EMI.

When Does it Make Sense to Purchase On No-Cost EMI?

When you badly require a product – say a desktop for your office, but you don’t have the budget to pay for it upfront.
You’re looking to improve the credit history and boost the credit score of your business.
In this case, taking a quick loan (no-cost EMI) and repaying it on time can give your credit score a boost.

Understanding How No-Cost EMIs Work Can Help You Make Smart Decisions

No-cost EMI is a great way to upgrade your office space and purchase gadgets without having to pay the entire amount.
But, remember that, it’s a type of loan ultimately, and you have to repay it.
Losing out on lucrative deals and discounts by opting for no-cost EMI may not be worth it.
So, before you take the plunge, make sure to weigh the pros and cons of your decision carefully.
Evaluate whether you need the product right away or if you could postpone the purchase a few months until you can raise funds for it.
And, if you decide to go for no-cost EMI, make sure to read the fine print, so you don’t get surprises later on.
If you decide to offer no-cost EMI to your customers, you can partner with the right banks/NBFCs to provide your customers with this payment option.

Be Credit Smart & Make Smart Financial Decisions!

FAQs

Q-What is the difference between taking a regular EMI and a no-cost EMI?

Ans- When you repay a regular loan EMI, it includes two components – the principal (the original amount borrowed) + the interest. On the other hand, even though the no-cost EMI has hidden interest, the EMI appears to include only the principal (product price).

Q- Can I get a no-cost EMI without a credit card?

Ans- Yes. No-cost EMIs are also offered on select debit cards and preloaded cards. To check if you’re eligible for no-cost EMI on your debit card, get in touch with your bank.

Q- What are the products I can purchase using no-cost EMI?

Ans- No-cost EMI is generally offered for:

Gadgets like laptops, mobiles, cameras, etc.
Appliances like washing machines, air conditioners, televisions, refrigerators, etc
Furniture
Flight tickets and many more

Q- Does no-cost EMI involve processing fees?

Ans- Yes. There’s a small processing fee that is generally added to your first EMI. In the case of no-cost EMI on HDFC and ICICI credit/debit cards, the processing fee is a flat Rs.199.

Q- Is down payment needed when I choose no-cost EMI?

Ans- No. You don’t have to pay any money upfront while purchasing a product using no-cost EMI. However, note that you need to have sufficient funds to pay the first instalment.