You don’t get discounts: Generally products having the EMI options do not carry benefits of discounts or offers, which may otherwise be available on such products. For instance, a mobile phone which costs Rs. 37,000 under the EMI options may be available at Rs. 36,000 without the EMI option in the same store.
You may end up paying a higher amount: Most EMI schemes come with a hidden cost, which represent the interest you will have to pay to make use of the facility. Let’s explain with an example. Suppose you opt to purchase an LCD worth Rs. 35,000 through an EMI scheme offered by the merchant outlet, in tie up with your credit card company. It is a 6 month EMI option with a down payment of Rs. 5,000, which should have translated to a monthly instalment of Rs. 5,000. However, on enquiring further, you realise that after a down payment of Rs. 5,000, your monthly instalment for 6 months works out to Rs. 5,500, resulting in you paying Rs. 3000 more on the total bill. This represents the interest cost.
Don’t forget the other costs apart from interest:
- Most card companies charge processing fees when an EMI scheme is opted, which is a percentage on the transaction amount.
- You will even be charged hefty penalties if you default in paying the EMIs. This is because the EMI amount is added to your monthly credit card bill, and any failure in payment will mean getting charged a normal interest of 24%-36% for non-payment + late payment fee + taxes and also the specific basic interest cost for the EMI amount.
- The third fee which your credit card company will charge you is if you pre-close your EMI. This means that if you wish to pay off the entire outstanding amount at any point during the tenure, you will be charged a pre-closure penalty, which is usually between 2.5%-3% of the outstanding principal amount.
So what should you evaluate before you opt for an EMI Scheme?
The different possible costs attached to an EMI scheme necessitate thorough evaluation of the terms and conditions before you opt for it. Remember to read the fine print carefully as companies can change their terms at any time. Also remember to check the total amount you will pay, including all EMIS and down payments. If this exceeds the MRP of the product, it means you are paying more due to the interest and processing fees, and can get a better deal elsewhere. So always check for the price of product across different stores - both offline and online. You may get the product at a lower price if you do not opt for such a scheme.
You should also look at the flexibility in closing the scheme, by checking for pre-closure penalty clause. Your existing card limit will come down to the extent of the outstanding amount under the EMI scheme, and this is an important factor to be considered; especially, if you always spend close to the credit limit.
Should you or should you not opt for the EMI scheme?
A good EMI scheme makes purchases easy. But remember that this is one way of tempting you to buy expensive products which you may not be able to actually afford. Hence try to avoid this as the first option. Indulging first and relying on EMI payments later is not a healthy practice when it comes to your personal finances. If at all you want to opt for such a scheme, you must definitely consider all the costs associated, and accordingly decide whether it should be taken or not.
Additional Costs when you opt for an EMI Scheme: Interest cost, Processing fee, Absence of discounts, Penalty if there is default in EMI payment and Pre-closure Penalty.
Things to evaluate when you opt for an EMI Scheme: Read the fine print thoroughly, compare the price you will pay vis-à-vis the MRP, compare the price across different stores, see if you can get discounts if you do not opt for EMI scheme, analyse pre-payment penalty clause and ascertain the change in credit limit.