What if 0% EMI actually costs you 9% or more?
Wait. What? How can 0% not be 0%?
From a zero-cost EMI, you are likely to be paying 9% or even more!
How? Two things that contribute are:
Processing fees
GST on fees and interest
Now, this is a strange beast because GST applies only to credit card charges (whether it’s called interest or a fee, it’s charged GST). But if you actually take a loan from a bank or NBFC – you don’t have any GST on interest.
A little charge called the processing fee can change things. You pay an innocuous Rs. 199 on the first instalment. Plus 18% GST. That’s a Rs. 235 extra. Oh, not much you think, but it gets more interesting.
Interest payments on credit cards are charged an extra 18% GST. This is not something they’ll tell you upfront, but you’ll see it on your bill. It takes a little effort to break down the monthly payment into principal and interest. (See functions PPMT and IPMT in excel) If we add up the amounts paid per month, that tiny little GST will add more to the monthly payment.
And the effective cost (using an IRR function) will come to more than 9% a year!
It can also get worse, i.e. greater than 20%.
How?
If you use this specific card – the Amazon ICICI card – you get 5% cash-back on all purchases on that card. (3% for non-prime members)
Except, if you use it for an EMI purchase, no cash-back.
The cash back, of course, is real money. you could have paid it upfront in full on the card, and gotten the cash back instead. So the product actually costs you 5% lesser. So if you put that into the same calculation, guess what happens: The effective interest cost to you is a whopping 27%. (for a non-prime member: 20%)
How to work around this?
There are some workarounds:
Large amounts: While the calculations fail for Rs. 11,700 worth of a product, does it get better for something that’s more expensive? At a cost of Rs. 27,000 the interest rate falls to 4% (because the processing fee is fixed) if you don’t consider the 5% cashback. But then, I don’t think you could avoid thinking that a 5% cashback tips the whole thing back into the “pay it all right now”.
Longer periods: A longer-term interest-free EMI will usually work better for you. In 2002, I bought a (really expensive) TV with a 36-month zero-per cent EMI with no processing charges. That was truly zero cost for me, but I struggle to find such deals nowadays.
Cheers!
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