No Cost EMIs: Are they real?

Are you planning to buy consumer durable item on EMI or you are planning a foreign trip on EMI? Do you know the hidden cost of no cost EMIs or low-cost EMIs? Is there a better way to plan for that?

In this post, we will try and explain that. First, let’s explain the jargons of No cost EMI and low-cost EMIs before moving forward.

No Cost EMIs/ Low-cost EMIs: – This is nowadays shown a selling point for most of the consumer durable products, but, these are not cost-free but have hidden cost attached to them. The manufacturer or distributor pays the company from its margins the cost of finance, which it would have passed to you in case of cash or card purchase. This is the inherent cost, which is not visible to the consumer. This could easily range from 18%-24% p.a. as interest costs

Now, suppose you are planning to buy a 50-inch television at a cost of INR 50,000 at no cost EMI over a period of 6 months, the dealer can offer you to pay some upfront amount and rest converted in EMIs over 6 months. You might have to shell out INR 6,000 Per month over the next six months (which will include inherent interest cost), but if you act smartly and can delay the purchase by 4-5 months you can reduce the cost of ownership significantly by a process we call Reverse EMI/SIP.

Reverse EMI/SIP: You will have to make equivalent to EMI or slightly lesser contribution towards liquid or some safe fund, where you will end up earning interest up to 7% p.a. With the money accumulated over the period you can buy the product up front and get a good bargaining thus reducing the cost of ownership by 10-15%.

This will not work in case of emergency fund requirement but is highly recommended in case of any high ticket item which can be delayed.

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