7 reasons to avoid the EMI route this festive season

NDTV Profit Desk

12 Oct 2013, 03:07 PM IST

Higher amount paid: Raj opted to purchase his mobile phone worth Rs. 40,000 through an EMI scheme offered by the retailer in collaboration with his credit card company. The EMI was for 6 months, which should have technically worked out to a down payment of Rs. 4,000 and 6 EMIs of Rs. 6,000 each. But Raj discovered that he had to pay a down payment of Rs. 4,000 and 6 EMIs of Rs. 6,833 each, which means, he would end up paying Rs. 5,000 more on the product. This is because most EMI schemes come with a hidden cost, which is the interest you have to pay.
Additional costs: Apart from the interest cost, most credit card companies charge a processing fee when you opt for an EMI scheme. This is a percentage on the transaction amount and varies from bank to bank.
Default in paying EMIs: The EMI amount will get reflected on your monthly credit card bills along with your other dues. So when you fail to make the payment of your credit card dues in a month, you will be charged the normal interest of anywhere between 24-36 per cent for non-payment along with the late payment fee and taxes. The EMI amount, in addition to being subject to these charges will also carry the basic interest cost resulting in a double whammy.
Absence of discounts: Often banks tie up with merchant outlets and offer the EMI option on various products. However, most products carrying the EMI option do not have the benefits of a discount or any offers attached to them. For example, an LCD costing Rs. 30,000 under the EMI option may be available at Rs.27,000 without the EMI option.
Pre-closure penalties: If you purchase a product on an EMI scheme offered by your credit card company, it is most likely that there will be a pre-closure penalty. This means that if you have the cash to pay off the entire amount before the completion of the total number of EMIs, you will have to pay a pre-closure charge, which is usually in the range of 2.5-3 per cent of the outstanding principal amount.
Things to evaluate before opting for an EMI Scheme: As you can see, even though an EMI option may be light on your pocket, there are several costs attached to it. You must therefore evaluate the offer on the table before you opt for it. As a first step, remember to read the fine print thoroughly, as card companies can change terms at their discretion. You must also check if the total payment you are making, including all the EMIs and the down payment is equal to the MRP or maximum retail price of the product or if it is more than the quoted price. If it is more, then it means you are being charged interest and/or processing fees for the option. You must then check all options for the product in other stores - both online and offline, and see if you can get the product at a better price if you do not opt for EMI. If the difference is substantial, it is better to opt out of EMI. Remember to consider the likely costs like pre-closure penalty when you evaluate the EMI option, as there are a few credit cards which offer zero pre-closure charges. This is because you should have the flexibility to close the scheme when you have excess cash. Also remember to consider how the existing credit limit on your card will change because of opting for the EMI scheme. When you use EMI on credit cards, your existing credit limit comes down to the extent of the outstanding amount.
Impact on finances: Although a good EMI scheme is easy on your wallet, you must try to avoid it as the first option. You may not only be spending more than the actual worth of the product, but also splurging first and then relying on EMI payments is not healthy for your finances. Remember to evaluate all costs associated with the scheme and then choose or reject it.

BankBazaar.com is an online loan marketplace.

Disclaimer: All information in this article has been provided by BankBazaar.com and NDTV Profit is not responsible for the accuracy and completeness of the same.