“No-cost EMIs” & “pay later” options in online shopping. What’s the catch?

Easy payment schemes make us lose out on the opportunity to think before making the final payment for a purchase.

Oct 15, 2019 08:10 IST India Infoline News Service

Online shopping
It is that time of the year when we find a guilt-free reason to shop, when we can replace our old household appliances to new ones, and give our wardrobe a complete makeover. Yes, the period when online shopping websites compete to give us bigger discounts on products. It can’t be Diwali or Dussehra without the precursor of highly discounted online shopping. Attractive e-commerce deals during the festive season also come with multiple payment options from credit card, debit card, various e-wallets, to internet banking. You must have often seen that there are two more options available to us, i.e., “No-cost EMI” and “pay later.” Is there a catch in these offers? Should you opt for them? Let us find out.
 
No-cost EMI- This refers to a payment schedule which does not involve interest payments on the face of it. The Reserve Bank of India (RBI) in its circular in 2013, has said that the concept of 0% interest is not valid. This means that banks are clearly not entitled to provide loans at a zero percent interest rate, or in other words, no-cost EMI. Then, how are the retailers running this offer?
 
This works in two ways:

When the discount works as interest: No cost EMI sounds like you don’t have to pay any interest on the loan, but in reality, you do. Your bank will take back the discount in the form of interest. Suppose you want to buy a laptop that costs Rs50,000. Under the 3-month EMI plan, at an interest rate of 15%, you would have to pay an interest amount of Rs7,500. If you make an upfront payment, the laptop would cost just be Rs42,500, with you getting a discount of 15% over the original cost. If you opt for the no-cost EMI option, you are cannot avail the discount, and have to pay the original price through EMIs. The total price you pay on the laptop is split into money paid to a retailer and interest paid to the financier. Your bill for the purchase will show Rs42,500, but your total EMI outgo will be Rs50,000. You will also have to pay taxes to your bank, which are not included in the cost. This can be illustrated in the following manner:
Particulars Cost
Cost of laptop Rs50,000
Discount offered (Rs7,500)
Cost of laptop post discount Rs42,500
Total interest to be paid under EMI (In case of purchase on EMI) Rs7,500
Total amount to be paid by you under the EMI Rs50,000
 
When the product price is inclusive of interest cost: The other way in which the No-cost EMI payment method works is by adding the interest amount to the price of the product. If we take the above example, the laptop costs Rs42,500. The retailer decoys you to buy this product under the “No-cost EMI” plan for Rs50,000. Here, the interest of Rs7,500 is already added to the cost of your product and will be paid by you in installments. In some instances, you can buy the product at its discounted price of Rs42,500 under the No-cost EMI option, but the Rs7,500 may be covered as processing fees.
 
Deferred payment:  The concept is known as “buy now, pay later.” Shoppers who choose this option at checkout receive a product right away, but pay for it in installments. Many payment apps, e-wallets, and online retailers are offering this option to customers. Though there are various permutations and combinations of this option across various financers and/or apps, most of them give the customer a window of 10-40 days from the date of purchase to pay the whole amount. If the customer is unable to pay the amount within the stipulated period, an interest or late fee is levied on the original amount. Another alternative is to pay the amount in installments over a 12-month period, with the first 3 months being interest free.
 
Should you opt for the deferred or staggered payment options?

The last 4 months of the year are probably some of the most expensive for people in general. Given the glitzy, round-the-clock advertising and marketing campaigns, attractively crafted payment schemes, and our own fear of missing out on them, most of us end up buying things we don’t need. Easy payment schemes make us lose out on the opportunity to think before making the final payment for a purchase. So, here are a few tips to get maximum advantage of such schemes:
  • Make a list of the items/products that you are vying to buy. Divide them in two categories, essential and non-essential items. Note the price of each product on the list that you are willing to spend on the product. Try to use the deferred and/or staggered pay methods only for items on your essential list. Further, make sure that the total cost you pay for the product, irrespective of the payment method, lies somewhere within the price range you fixed for the particular product.
  • Savvy consumers might opt for a “buy-now, pay-later option” if they are certain they will be able to pay for an item soon, probably due to an expected windfall of extra cash. On many occasions, opting for an EMI scheme may make you eligible for huge cashbacks or additional discounts, which tend to make the overall purchase lucrative. However, make sure your inflows are enough to make timely payments.
  • There are many apps that assist you and map out a budget for your online purchases. They also reward you for making gainful purchases and offer you various discounts and cashback schemes for maintaining financial discipline. Use these apps to help you navigate through various deals and discounts so as to make an informed decision.

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