No-cost EMI: Meaning, How It Works, and Is It Good or Bad?

A No Cost EMI is a financial option that lets you pay the full cost of an item in monthly instalments without any additional interest charges. It is a commonly provided option when purchasing high-cost items such as smartphones or home appliances. But are No-cost EMIs actually interest-free, and are they worth it? These are the questions we’ll tackle as we explore how it works, the advantages and disadvantages, and whether it is the right choice for you. Keep reading!

What is a No-cost EMI? 
 

A No-cost EMI allows people to purchase items by paying monthly instalments with no additional interest. The total amount paid in the form of EMIs will be equal to the original price of the product, so it seems like you're receiving an interest-free loan.

The word “no cost” implies that consumers will not pay anything above the product price, even when making payments over a few months. But the reality of No Cost EMIs is a little different; while you don't have a visible interest component, the cost structure comprises mechanisms that make all the stakeholders in the transaction profitable.

Also Read: How to Use an EMI Card for Online and Offline Shopping

How Does No Cost EMI Work?

A No Cost EMI is a joint agreement between the manufacturer, financial institution, and retailer. When you choose a No Cost EMI, the retailer gives a reduction in the marked price of the product upfront. This reduction is usually the equivalent of the interest that would have been paid on a normal EMI. It isn’t necessarily always the retailer to offer the discount; it could be provided from the manufacturer, shared between the retailer and manufacturer, or even from the lender.

For instance, if a mobile phone is priced at ₹60,000 and you opt for a 12-month No Cost EMI, the store may give you a discount of ₹6,000 (using an example of 10% per annum interest). Your EMI would now be charged on ₹54,000, to be paid in 12 monthly instalments of ₹4,500. Yet, the lender continues to charge interest on the lower amount, but the interest is the discount that the retailer is offering.
The facility of being ‘no cost’ can easily be misleading, and paired with credit facilities, can lure consumers into unchecked spending. As a result, the RBI has put forth strict policies of full transparency in the Master Direction – Credit Card and Debit Card – Issuance and Conduct Directions, 2022 .

Pros and Cons of No-cost EMIs

Also Read: What is an EMI Card: Features and Benefits

Is a No Cost EMI Good or Bad?

The worth of a No Cost EMI is highly dependent on your financial situation. For those who are financially prudent with stable salaries, no-cost EMIs can be convenient for cash flow management. It is logical when you have the option to pay the entire cost upfront but want to maintain cash for other purposes.

However, a No Cost EMI becomes problematic when used to purchase items beyond your actual affordability. The scheme can also be disadvantageous when dealing with depreciating assets like electronics, where the EMI period might outlast the product’s usefulness. 

Additionally, remember that in many cases, the final cost of a No Cost EMI ends up being inflated due to additional charges. Compare the final amount of opting for the No Cost EMI with the final amount on regular EMIs with interest to make sure you’re getting the better deal.

Also Read: How EMI Cards Can Help Improve Your Credit Score

To Conclude

A No Cost EMI can be useful to help you stagger expenses over time. However, to make it work for you, it is important to understand the exact cost structure and charges. Avoid the EMI structure if your income is unstable and be careful not to overuse it for non-essential purchases. Always read the terms and conditions before you take a No Cost EMI and ensure that your monthly budget takes the payments into account.

Frequently Asked Questions

Is a No Cost EMI interest-free?

A No Cost EMI is not truly interest-free in the traditional sense. While you don’t pay a separate interest component, the interest cost is typically absorbed through upfront discounts provided by retailers or manufacturers. The lender still earns interest, which is compensated through arrangements with the merchant rather than via direct charges to the customer.

What happens if I miss a No-cost EMI payment?

Missing a No Cost EMI payment can result in late payment charges, penalty interest, and a negative impact on your CIBIL score. Despite the “no cost” label, these EMIs are treated like any other loan obligations by credit bureaus and financial institutions.

Can I prepay my No Cost EMI?

Most no-cost EMI schemes allow prepayment, but terms vary by lender. Some institutions may charge prepayment penalties, while others allow free foreclosure. Check the specific terms and conditions of your EMI agreement for prepayment policies before agreeing to anything.

Are there any hidden charges in No Cost EMI?

While marketed as “no cost”, these EMIs often include processing fees, documentation charges, and sometimes annual fees for associated credit cards. Additionally, GST may apply to the interest component, even if it’s not directly visible to the customer.

What is the minimum credit score required for No Cost EMI?

Most lenders require a minimum credit score of 700-750 for No Cost EMI approval, though requirements vary by institution and purchase amount. Higher credit scores typically result in better approval rates and higher credit limits.

Can I cancel my No Cost EMI?

Yes, it is possible to cancel a No Cost EMI. However, different lenders will have their specific terms and conditions regarding cancellation.