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Are No-cost EMI Loans Genuine or Fake?

Last month, I went to buy a washing machine. The model that I finally selected, after evaluating my requirements, cost around Rs.33,600.

I had two options to pay...
... 100% via cash, since I had sufficient bank balance, or
... EMI on my credit card @13% interest rate i.e. Rs.3000 for 12 months

To save on the unnecessary extra interest burden of Rs.2400 on the credit card EMI, I decided to pay cash.

That’s when the store manager offered me an UNBELIEVABLE deal... a No-cost EMI Loan.

As per the said scheme, I had to simply pay the amount due in 10 monthly instalments — at no extra cost — i.e. Rs.3360 per month for 10 months.

Since it sounded "too good to be true", I initially had my doubts.

Because, after all, someone was going to be out-of-pocket for 10 months.

Because, after all, someone was paying the cost of financing me for free.

However, after analyzing the whole offer thoroughly, I was convinced that there were no hidden devils in the fine print. And, I accepted the offer.

Of course, not all such No-cost EMI loans come with no strings attached. One must, therefore, study each offer carefully before opting for the same.

By the way: Many people often go for personal loans for purchasing mobile phones, consumer durable, laptops, electronic gadgets, etc. These, however, are relatively costlier. As such, one must first explore the no-cost EMI option or the EMI on Credit Card, before zeroing in on a personal loan.

Meanwhile, here are the key aspects of a typical No-cost EMI scheme that you should be aware of.

1. How’s the deal structured?

Normally such schemes are financed by a Finance Company. So, it becomes a transaction between the buyer and the finance company. The store selling the product, is (financially) not involved in such deals.

The finance company pays the full amount to the store on our behalf. 

In turn, we have to pay our EMIs to the finance company.

2. So how does the finance company recover its costs?

The finance company receives the interest cost from the product manufacturer.

It is the product manufacturer who finally bears the cost of No-cost EMI loan. It is part of their sales budget. Given the intense competition, No-cost EMI loan is a sales promotion strategy adopted by many manufacturers to push their product. 

Therefore, you will find the No-cost EMI offers on selected products and brands only. Also, for it to be a viable proposition for the manufacturer, such offers are normally given on higher-end products only.

3. How do you approach such finance companies?

For your convenience, the representatives of the finance company are stationed at the store itself. So you don’t have to go anywhere. 

Everything is handled at the store premises.

No-cost EMI Loans are not black and white deals. Do read the fine print CAREFULLY.

4. What is the procedure for availing such No-cost EMI loans?

It’s like any other loan. So, there will be the usual documentation to be done with the finance company.

Thankfully this is only minimal and includes primarily your identity and address proof, one photograph, six-months' bank statement, one cancelled cheque and ECS mandate.

Accordingly, a pre-approved loan limit would be set-up in your name. Once done, you can buy your desired product(s) at no-cost EMI. 

The EMI is directly deducted from your account every month. So, except for keeping sufficient balance in your account, you don’t have to do anything extra once the deal is done.

5. Are there any charges involved?

When you avail the facility for the first time, you may be charged a nominal fee (normally in the range of Rs.300-1000) as administrative charges towards issuing you an EMI card. Subsequent purchases may not attract this charge. (Only when the card expires after 1-2 years, you may have to pay the renewal charges.)

In addition, the finance companies may levy processing and legal fees. Ideally, this should be zero. In fact, finance companies are quite flexible here. So you should always negotiate on the processing fees. If not nil, at least get the same reduced.

6. Can this EMI card be used at other stores?

As mentioned earlier, this loan comes to you from the finance company and not the store from where you make the purchase.

Hence, such EMI cards are not specific to a particular store. They can be used at other stores too.

In fact, the best thing is that this EMI card can be used even for online purchases (instead of the usual debit / credit card, internet banking or COD.)

Thus, you get the opportunity to buy a wide variety of products at no-cost EMI.

7. What could be the hidden devils in a No-cost EMI Loan?

Apart from the charges, one important aspect that you should ALWAYS ascertain is the Cash Discount, if any.

Sometimes, the product is sold at a discount, if the buyer pays the entire amount upfront. This, as you are aware, is known as cash discount.

If you avail the No-cost EMI scheme, you will not be eligible for this cash discount. So, indirectly this becomes your interest cost.

For the deal to be really meaningful and lucrative, the product should be available at the same cost — whether you pay cash or EMI.

It was this point which I had checked, before buying the washing machine on no-cost EMI loan. Since (a) there was no difference whether I paid cash or EMI and (b) my total outgo was same whether I paid immediately or over 10 months, it made sense to opt for the no-cost EMI scheme. I would earn some interest while the money is with me for 10 months. 

These, in a nutshell, are the salient features of a typical No-cost EMI loan.

It is a genuinely no-cost deal, if there is absolutely no difference between paying 100% cash vs paying EMIs.

Else, it is just a gimmick to fool you.

So get your facts rights, before you sign on the dotted line.

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