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Tata Capital > Blog > Personal Use Loan > Personal loan vs Zero-cost EMI: What to choose and when?

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Personal loan vs Zero-cost EMI: What to choose and when?

Personal loan vs Zero-cost EMI: What to choose and when?

Summary
The choice between a personal loan and a no-cost EMI loan depends on your cost structure and purchase size. A no-cost EMI loan means dividing a product’s cost into equal monthly payments without paying additional interest. To cover the interest banks would normally charge, the seller gives you a discount. The tenure for a no-cost EMI personal loan is generally short, from 3 to 12 months. You can use it to buy specific items like appliances, phones, or laptops at retail stores.

A no-cost EMI loan is meant for a single purchase from a partner merchant, usually for a shorter tenure and a fixed amount. A personal loan provides unrestricted cash that you can use anywhere.

The Reserve Bank of India (RBI) says the idea of true zero percent interest does not exist. A no-cost EMI loan is not completely free. The interest is usually hidden in a discount you give up or a processing fee you pay. However, that does not make it a bad deal. This article shows where the cost hides, how to compare it with a personal loan, and when each option is the better choice.

What is a no-cost EMI?

A no-cost EMI is a payment option offered by a merchant and a lender that lets you pay for a purchase in equal monthly installments without interest shown on the invoice. However, the financing cost is usually recovered through a forgone discount, a processing fee, or the product price.

Is a no-cost EMI really free? What does the RBI actually say?

The RBI has clearly said that true zero percent interest does not exist. In its September 17, 2013 circular (DBS.CO.PPD No. 3578/11.01.005/2013-14), it stated that the interest element was often hidden and passed on to customers, usually through processing fees. It also directed that, where a manufacturer provides a subvention, the loan should be sanctioned after reducing the discount instead of showing the interest as zero.

Where the cost is hidden: Four places to look

To find where the interest cost is hidden, you must check the following:

  1. Forgone discount: If the cash discount disappears when you choose EMI, that lost discount is your financing cost. To check, compare the cash and EMI prices.
  2. Processing fee: A fee may be charged separately. To check, read the fee schedule.
  3. GST: GST may apply to the bank’s interest component. To check, review the loan statement.
  4. Foreclosure charges: Early closure may attract a fee. To check, read the foreclosure terms.

Worked example: The same TV, two ways

Here’s an example that helps you understand how the two purchase methods differ.

A TV is listed at Rs. 50,000. Buyer A pays cash and receives an instant discount of Rs. 7,000, paying Rs. 43,000. Buyer B selects a no-cost EMI loan, forfeits the discount, and pays Rs. 50,000 across six installments, plus a processing fee, plus GST on the interest component.

The differing calculations will be as follows:

OptionWhat you pay?Effective cost
CashTV price Rs. 50,000 – Rs. 7,000 (discount)Rs. 43,000
No-cost EMISix EMIs worth Rs. 50,000 + Rs. 500 processing fee + 18% GST on the fee (Rs. 90)Rs. 50,590 (Rs. 7,590 more than cash)
Personal loan (12% per annum, 6 months)Rs. 50,000 to the seller + Rs. 1,762 interest to the lenderRs. 51,762 (interest over six months)

No-cost EMI vs Personal loan: How do they compare?

Here’s how a no-cost EMI compares against a personal loan.

FeatureNo-cost EMIPersonal loan
What it fundsOne specific purchaseAny personal expense
Where you can use itPartner merchants onlyAnywhere you need funds
Typical ticket sizeUsually limited to the product valueCan be much higher, subject to eligibility
Typical tenureUsually 3 to 24 monthsUsually 12 to 60 months (or longer with some lenders)
How interest is chargedInterest is often recovered through a forgone discount, processing fee, or product pricingInterest is charged at the stated reducing-balance rate
Transparency of costCan be less obvious unless you compare the final payable amountEasier to compare because the interest rate and charges are disclosed
Effect on credit limitMay reduce your available credit limit if linked to a credit cardDoes not use your credit card limit
Prepayment termsEarly closure may attract foreclosure charges, depending on the lenderPrepayment may attract charges, depending on the lender and loan terms
Effect on credit scoreTimely payments can help your credit score; missed EMIs can hurt itTimely repayments can help your credit score; missed EMIs can hurt it

When is a no-cost EMI the better choice?

You can choose a no-cost EMI when the cash price and EMI price are exactly the same, the processing fee is minimal, and the tenure is only 3 to 6 months. In that case, it can cost less than a personal loan. You must always ask for the cash price first. If it matches the EMI price, the EMI is usually the better choice. 

Also Read – maximum and minimum tenures for personal loans?

When does a personal loan make more sense?

A personal loan makes more sense when a no-cost EMI is not the right fit, such as in the following situations:

  • The purchase is not from a partner merchant.
  • You need a larger loan amount or a longer repayment period.
  • You are paying for multiple expenses, not just one purchase.
  • You want to keep your credit card limit available.
  • The no-cost EMI loan’s hidden costs, such as a forgone discount, processing fee, and GST, are higher than the personal loan’s disclosed interest.

What should you check before you click ‘No-Cost EMI’: A 5-point checklist?

  1. Ask for the cash price and compare it with the EMI price.
  2. Ask for the processing fee in rupees.
  3. Check if GST applies to the interest component.
  4. Ask about foreclosure charges for early closure.
  5. Ask for the Key Facts Statement to see the all-inclusive APR before you decide.  

Also Read – Pre-EMI vs full-EMI

Conclusion

The RBI says true zero-percent interest does not exist. While a no-cost EMI may hide costs, some offers are genuinely good. Make sure you compare the cash price and ask for the Key Facts Statement. Check out Tata Capital Personal Loan for transparent, disclosed pricing.

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FAQs

Why did the RBI ban zero percent EMI schemes?

The RBI has acted against misleading “zero percent EMI” practices where the true cost was hidden from customers. Lenders and merchants must clearly disclose all charges and pricing.

Is GST charged on a no-cost EMI?

GST may apply to processing fees or other service charges, if any. GST is not levied on the no-cost EMI itself.

Do I lose the discount if I choose a no-cost EMI?

Sometimes. Some merchants reduce or remove the upfront discount when you opt for a no-cost EMI. You must compare the final price before deciding.

Is a personal loan cheaper than a no-cost EMI?

It depends. A genuine no-cost EMI loan can be cheaper for a single purchase. A personal loan may be better if you need funds for multiple expenses or larger amounts.

Does a no-cost EMI affect my credit score?

Yes. Paying EMIs on time for a no-cost EMI loan can help improve your credit score, while missed or late payments can lower it.

Can I foreclose a no-cost EMI early?

Many lenders allow early foreclosure, but some may charge a foreclosure fee or have a lock-in period. Go through the lender’s terms before closing the loan early.
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