Hidden costs in a no cost EMI!

0:00 Nlesha, someone I look up to in the industry, recently put out a tweet on the Amazon Prime Day sales. The tweet had many interesting data points, but what caught my attention was this. Every 16 seconds, there were 18,000 orders on Amazon. One out of every four, that's nearly 25% of these sales were on EMIs. 9 out of 10 EMIs, that's almost 100%, were nocost EMIs. Most of the EMI spending were on electronic gadgets, smartphones, laptops, speakers, appliances, etc. I was curious to know why people are buying things on no cost EMI and I spoke to Rohan, a friend of mine who bought a laptop on the sale day. Initially, he started off with the

0:45 specs of the laptop, how lightweight it is, the processor, the memory, the cool looks it has and all that stuff. Then we spoke finance. Rowan said the laptop costed him 1 lakh 28,000 and immediately he said, "But I'm paying this through EMI." Of course, the moment someone tells me they're taking a loan for something that's going to lose value the day they buy it, I get into my lecture mode. I started by saying the usual, "Why would you want to buy a laptop on EMI? It's a depreciating asset. Its value keeps going down and you're paying interest on top of it." But he cut me off and said, "Who said I'm paying interest? It's a no cost EMI plus I got 8,000 rupee discount." That made me

1:30 pause. 8,000 rupee discount for taking an EMI. That's unusual. So naturally, I got curious. My colleague Satya and I spent the evening browsing through various e-commerce platforms to see what really is happening. And this is what we found. Most places now give you three options. First, you pay the full amount up front. Sometimes there's a discount, sometime there isn't. Second, take a regular EMI with interest. You pay somewhere around 15 to 16% interest and maybe get some discount on the product cost. The third is the no cost EMI. They say zero interest and often it comes with the best discount. Now, traditional finance

2:16 wisdom says you should pay upfront for consumer durables. Therefore, the second option is clearly not great because you're paying more in interest than you save in discounts. But what about the third option? Is it really no cost? So, here is what actually happened to Rohan. He bought his laptop for 1.2 lakhs after the 8,000 discount. Everything seemed fine. Then he gets his credit card statement and guess what? There is an interest showing up. He got confused, called his bank and this is what they told him. Sir, no cost EMI doesn't mean we are giving you free money. We are still a bank. What happens is we split your 1.2 lakh into two parts. Principal

3:01 and interest. You're still paying 1.2 lakh total, but we record it as 1 lakh principal and 20,000 interest. The bank basically uses its standard interest rates of around 15 to 20% to calculate the split. Naturally, you may be thinking that nothing really changes here. Rohan still got his 8,000 rupee discount. Rohan still paid only 1.2 lakh which is the amount after discount. So what is the big deal? Well, here is where things get interesting. There are two costs that people don't know about. First, GST on interest. Now, here is something most people don't realize. GST is charged on credit card interest. This

3:47 doesn't happen with other types of loan, but credit cards are different. So, in Rohan's case, interest component on records is 20,000 rupees. GST on this is 18% which is 3,600 rupees. Second part, the processing fee. Most banks charge a minimum of 100 rupees plus GST. So about 118 rupees. But do note 100 is on the lower end and it can get as high as 800 to,000 in some cases. Now let's do the actual math. Laptop cost after discount 1.2 lakhs. GST he has to pay 3,600. Processing fee which is on the lower end is 118. Total he actually paid 1 lakh 23,718.

4:36 So out of his original 8,000 rupee discount his real benefit was only rups 4,300 rupees. And here's the thing if your EMI tenure increases it gets worse because interest component becomes larger which means more GST. After hearing Rohan's story I thought let me test this myself. I randomly picked up a smartphone on Amazon. The 12-month no cost EMI from a popular bank's credit card came with 5,000 rupee discount. Sounds good, right? But when I calculated the GST on interest and the processing fee, that discount effectively became 3,500 rupees. Now the upfront payment option for the same phone was 4,750 rupees discount. Clearly

5:24 paying upfront was still a better choice. The problem is calculation is never shown to you upfront. You have to figure this yourself. But you know what worries me more than the hidden cost. I've noticed that on these shopping platforms, longer EMI tenure, like 12 to 18 months often come with better discounts compared to the shorter ones. Why do you think that is? It's because the lenders know that the longer the tenure, the higher the chances of you defaulting. And if you default, these interest rates jump as high as 50% perom. Your credit score gets damaged. The penalties are harsh. But here is something even more dangerous happening here. EMIs psychologically makes us comfortable buying things we can't

6:11 really afford. That 1.28 lakh laptop becomes just 10,000 rupees per month in our mind. We start taking multiple EMIs thinking it's manageable. Before we know it, we are paying 20,000 30,000 rupees in EMIs every month. I've seen this happen to so many people. They keep telling themselves, I won't default. I will pay on time. But life doesn't always go according to the plan. I'm not saying EMIs are always bad. There are situations where they might make sense. For instance, if you have the money but you want to keep it liquid for emergencies, then it's all right. Or if EMI deal genuinely saves you money after accounting for all costs, then of course, why not? But here is what I want

6:58 you to remember. Always compare your EMI option with paying up frontont. Do the math first. Include the GST, include the processing fee, and factor in the tenure of your EMI. Most of the time, you'll find that paying upfront is still better. Also, remember, many EMI options have foreclosure charges. Some banks even take back the discount if you try to close the loan early. Lastly, debt has become very easy to access these days. It's packaged attractively, marketed aggressively, but it's still debt. No cost EMIs aren't necessarily evil, but they are not really no cost either. You need to understand what you're getting into. By the way, Rohan's story ended well. Even after the hidden

7:44 cost, his discount was still worthwhile. But now he knows how to calculate properly the next time and that's what I want you to do as well. Don't be afraid of financial products but understand them before you use them. Do let me know in the comments, have you taken a nocost EMI before? Did you know about these hidden costs? And I'll see you all in the next video.