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Summary 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.<\/p>\n\n\n\n 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<\/a>, and when each option is the better choice.<\/p>\n\n\n\n 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<\/a> without interest shown on the invoice. However, the financing cost is usually recovered through a forgone discount, a processing fee, or the product price.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n To find where the interest cost is hidden, you must check the following:<\/p>\n\n\n\n Here\u2019s an example that helps you understand how the two purchase methods differ.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n The differing calculations will be as follows:<\/p>\n\n\n\n <\/p>\n\n\n\n Here\u2019s how a no-cost EMI compares against a personal loan.<\/p>\n\n\n\n <\/p>\n\n\n\n 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. A personal loan makes more sense when a no-cost EMI is not the right fit, such as in the following situations:<\/p>\n\n\n\n
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\u2019s 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. <\/em><\/strong><\/p>\n\n\n\nWhat is a no-cost EMI?<\/strong><\/h2>\n\n\n\n
Is a no-cost EMI really free? What does the RBI actually say?<\/strong><\/h2>\n\n\n\n
Where the cost is hidden: Four places to look<\/strong><\/h2>\n\n\n\n
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Worked example: The same TV, two ways<\/strong><\/h2>\n\n\n\n
Option<\/strong><\/td> What you pay?<\/strong><\/td> Effective cost<\/strong><\/td><\/tr> Cash<\/td> TV price Rs. 50,000 – Rs. 7,000 (discount)<\/td> Rs. 43,000<\/td><\/tr> No-cost EMI<\/td> Six EMIs worth Rs. 50,000 + Rs. 500 processing fee + 18% GST on the fee (Rs. 90)<\/td> Rs. 50,590 (Rs. 7,590 more than cash)<\/td><\/tr> Personal loan (12% per annum, 6 months)<\/td> Rs. 50,000 to the seller + Rs. 1,762 interest to the lender<\/td> Rs. 51,762 (interest over six months)<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n No-cost EMI vs Personal loan: How do they compare?<\/strong><\/h2>\n\n\n\n
Feature<\/strong><\/td> No-cost EMI<\/strong><\/td> Personal loan<\/strong><\/td><\/tr> What it funds<\/td> One specific purchase<\/td> Any personal expense<\/td><\/tr> Where you can use it<\/td> Partner merchants only<\/td> Anywhere you need funds<\/td><\/tr> Typical ticket size<\/td> Usually limited to the product value<\/td> Can be much higher, subject to eligibility<\/td><\/tr> Typical tenure<\/td> Usually 3 to 24 months<\/td> Usually 12 to 60 months (or longer with some lenders)<\/td><\/tr> How interest is charged<\/td> Interest is often recovered through a forgone discount, processing fee, or product pricing<\/td> Interest is charged at the stated reducing-balance rate<\/td><\/tr> Transparency of cost<\/td> Can be less obvious unless you compare the final payable amount<\/td> Easier to compare because the interest rate and charges are disclosed<\/td><\/tr> Effect on credit limit<\/td> May reduce your available credit limit if linked to a credit card<\/td> Does not use your credit card limit<\/td><\/tr> Prepayment terms<\/td> Early closure may attract foreclosure charges, depending on the lender<\/td> Prepayment may attract charges, depending on the lender and loan terms<\/td><\/tr> Effect on credit score<\/a><\/td> Timely payments can help your credit score; missed EMIs can hurt it<\/td> Timely repayments can help your credit score; missed EMIs can hurt it<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n When is a no-cost EMI the better choice?<\/strong><\/h2>\n\n\n\n
Also Read<\/strong> – maximum and minimum tenures for personal loans?<\/a><\/p>\n\n\n\nWhen does a personal loan make more sense?<\/strong><\/h2>\n\n\n\n
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What should you check before you click \u2018No-Cost EMI\u2019: A 5-point checklist?<\/strong><\/h2>\n\n\n\n
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