No Cost EMI is not interest free, know how No Cost EMI works || Commerce News Guruji

Most offline and online retailers enter into an agreement with the specialized financial institutions for consumer durable loans, so that they can sell electronic appliances, gadgets, etc. to those customers who cannot afford to pay for the full payment. However, such loans are promoted as a no-cost EMI, but in reality, a higher interest rate ranges from 16 to 24 percent is levied.

What is No Cost EMI?

No Cost EMI is an offer by which the total amount paid by you to the EMI provider will be the price of the product split equally across the EMI tenure. The interest payable to the bank will be offered as an upfront discount during checkout, effectively giving you the benefit of No Cost EMI.

(Also read: Online Safety Tips for Parents, Youngsters and Organisation)

What does the Law says?

Reserve Bank of India (RBI) said in a circular of the year 2013 that no loan is free of interest. On September 17, 2013, the circular says, "The amount of interest in the zero percent EMI scheme on credit card outstandings is often collected as a processing fee".

How does No Cost EMI work?

As stated in the circular of RBI, Zero Percent Scheme is nothing but a marketing technique and the interest of the loan is collected from customers indirectly. Two methods are adopted as under:

1. You do not get the discount on full payment, and the same amount of rebate is paid to the bank or the institution from which they agreed upon for consumer durable loans.

Example:

No Cost EMI offer Price: Rs. 34,500

Rebate on full payment: Rs. 4,500

Product Actual Price: Rs. 30,000

You did not get the rebate and paid to bank as interest Rs. 4,500

Finally you pay: Rs. 34,500

Ultimately excess payment made by you is Rs. 4,500 (34,500-30,000) as interest charge.

2. Second method is that they add the interest amount on the loan only to the product.

Example:

Product Actual Price Rs. 30,000

Interest on EMI Rs. 4,500

No Cost EMI offer Price Rs. 34,500