Every year online selling platforms like Myntra, Amazon, Flipkart, etc. come with their mega sales or the so-called “Big Billion Sales” multiple times, and there starts the flow of various types of discounts and offers. It includes product discounts, banks, and financial institution discounts, offers on the usage of cards, exchange offers, and last but not least “zero-cost EMI” offers.

While the former four terms might be self-explanatory here, the last one is not really. Neither is it as exciting as its name suggests- “Zero Cost EMIs”. So, the question here is, “Are the zero-cost EMIs free of any interest cost?”

What is meant by zero-cost EMIs?
This is an offer provided by the banks or financial institutions where the beneficiary pays for a product/service in affordable equal monthly installments without paying any interest on it. The concept itself looks so enticing that more often people tend to use this method of payment to fulfil their shopping requirements. But the reality is quite different in this case. At any time such EMI offers to charge a customer a good rate of interest ranging from 12%-15%. Now, one may wonder, how come they are called zero-cost EMIs then.

RBI circular on zero-interest loans
RBI in its circular dated 17th September 2013, has stated very clearly that the concept of zero interest is non-existent. This circular also states that the interest rates are often camouflaged and passed on to the customer in the form of processing under any zero-interest installment schemes. Then how is it even possible for any financial institution to offer such a scheme when the central bank itself states that no such schemes exist?

Marketing gimmick of zero-cost EMIs
These offers are just a marketing gimmick developed by the sellers and the financial institution that ties up with them. Zero-cost EMIs are never about “no costs”, but it’s always about “no visible costs”. It works in two ways:
Discount = interest
Selling Price = Actual Price + Interest Cost

In the first method of discount= interest, the online shopping customers forgo the discounts that they are otherwise eligible to avail to pay off the interest costs due to the banks or the financial institutions.
For example, suppose, the online price of an Alexa device is Rs. 10,000 and the discount on the product is 15% (i.e. Rs. 1500). In this case the customer should ideally get the device for a price of Rs. 8500. But under a zero-cost EMI offer, the same product will be offered to him for Rs. 10,000 in equal monthly installment, thereby, making the customer pay the discount amount which he/she is eligible to avail to pay off the interest cost.

This means, that the customer pays the original value of the product (Rs. 10,000 in this case) in multiple installments whereas the seller gets only the discounted price of the product from the customer (Rs. 8500 in this case) and the remaining amount (Rs. 1500 in this case) goes to the bank, although the break-up is not shown to the customer, forcing him/her to believe that he has availed finance for zero cost.

In the second method, where the selling price= actual price + Processing fee to cover up the interest cost, the product is not shown as discounted and hence, the interest amount is added to the price of the product. For instance, if we take the same previous example of a customer buying an Alexa device for Rs. 10,000, the customer might end up paying say 3 equal monthly installments of Rs. 3833.33, which includes the actual price of Rs. 10,000 plus a processing fee of Rs. 1500, which is collected to cover up the interest costs on EMIs, without actually being shown as interest amount. However, this method is not used anymore after the release of the RBI’s circular of 2013.

After knowing all of these facts, I don’t expect anyone to stop buying in zero-cost installments. But it might surely help one to make priorities and wiser choices while buying. The statistics show that almost one in every two Indians is open to taking a loan to improve their lifestyle. So buying products in installments is something which is not going to stop. But one should understand where and why they go for an installment purchase.

If it’s a necessity product, taking zero-cost EMIs makes sense as it’s one of the most convenient methods of buying when you don’t have money to pay in a single down payment. But for impulse buying, using zero-cost installments is overloading the financial burden as you end up paying more than what the price of the product is, which is not even a necessity. So, prioritizing the purchase is the only thing one can do while using zero-cost EMIs, which never come at zero cost.