A conversation between two colleagues during coffee time leads to an interesting explanation about an emerging loan product.
Vienna: Hi Tina, did you see what holiday sales are going on online? I have shortlisted some items for purchase.
Tina: No big ticket purchases this year, Vina. Spent a lot last month. Time to pull the strings of my wallet.
Vienna: Why not try the free EMI options offered by many sellers, including e-commerce sites?
Tina: No, us. EMI without cost is considered a misnomer.
Vienna: Why do you say that? The EMI premiums do not include any interest or any other additional fees. In addition, you can defer payment for your purchases from 3 to 12 months. What more could you ask for?
Tina: This is not entirely true. Many banks, non-profit financial companies (Bajaj FinServ) and other financial institutions (such as ZestMoney) with which e-commerce sites associate with lending partnerships, charge processing fees for these free EMI options. Starting at $99, the processing fee can go up to 1 percent of the order value. Besides, a few also charge additional pre-closing fees for loans, which may apply even if you return the product or cancel the purchase.
Like any other loan, installments in EMIs at no cost also have an interest component, which is given as an upfront discount, hence the term “no cost”. This interest ranges from 12 to 15 percent annually.
Vienna: Yes, isn’t that a good saving on the interest front? Imagine how many people could benefit.
Tina: There is another problem here. EMIs are available at no cost only to existing customers (debit or credit card holders) of the bank with which you share the e-commerce site. These customers must have a pre-approved credit or overdraft limit with the bank. Moreover, this option is only available on purchases above a certain limit, INR 5,000 in most cases. Moreover, partial payment is not an option either. You either need to pay in full or take advantage of the full no-cost EMI option. But the advantage is that one can avail the loan online and almost instantaneously, without visiting the branch and submitting many documents.
Vienna: Oh, these are part of pre-approved loans? Obviously, those who have already exhausted these limits with bankers, or have a low or no credit score, cannot take advantage of the free EMI options.
Tina: right. However, there are new players in the fintech space, such as ZestMoney, who are offering no-cost online EMI options even to those without pre-approved cards, credit points, or limits. One just has to register the mobile number associated with Aadhaar on the platform and complete the basic KYC for setup. Then, the site agrees to a certain credit limit based on your transaction history and the customer can take advantage of the no-cost EMI option on their partner websites. These come with different terms and conditions.
Vienna: But then again, I need to check if these players have partnered with the store I want to make a purchase at, or if the product I’ve chosen qualifies for such a choice of fintech players.
Tina: right! Net-net While no-cost EMIs seem interesting, remember that there is absolutely no free lunch.