0% EMIs aren't zero as you think. Here's why

There seems to be no end to the sales season. Days after the end of the Independence Day sales, we are inundated with offers for the Valentine's Day bonanza. One of the major attractions in such sales is the 'zero-interest' EMIs or 'no-cost' EMIs which offer consumers the chance to buy high-value items at easy monthly payments without interest.

But do you know that RBI banned banks from offering 0% interest schemes 10 years ago; to be precise in September 2013?

Terming it as a move to protect consumers, RBI, in its circular then said “...in principle, banks should not resort to any practice that would distort the interest rate structure of a product as this vitiates the transparency in pricing mechanism which is very important for the customer to take an informed decision.”

"Zero per cent interest is non-existent and fair practice demands that the processing charge and interest charged should be kept uniform product or segment-wise," it added in the circular.

If the banking regulator calls it a 'non-existent practice', then how come we are inundated with such offers?

The short answer is that no-cost or zero-interest schemes as offered by online and offline retailers and consumer finance companies are marketing gimmicks to tempt consumers to buy high-value products.

Hidden charges
One of the problems that the apex bank flagged was the lack of transparency. Meaning, at first look we are not sure if the offer has any hidden charges that may not be beneficial to the consumers. For sure some bank credit cards offer zero-interest EMIs or equated monthly schemes, to buy high-value consumer durables like iPhones or HDTVs.

For example, say a phone costs Rs 74,900. A retailer offers a zero-interest EMI scheme of Rs 12,483 for six months.

Done deal, you may think.

Actual cost
But here is the catch. The bank charges an interest rate, of anywhere between 14% and 20%. But this interest is absorbed by the seller upfront. The marketing material might claim that the seller has absorbed this discount amount. But you don't get this discount and end up paying the full Rs 74,900.

Cost of the Phone 74,900
Interest @15% 1,873 (absorbed as a discount)
6-month EMI 12,483

For one, by opting for the plan, you may end up losing the actual discount that you can avail of otherwise. If you were to pay upfront, you can ask for that discount portion and pay only the rest. But not in zero-interest schemes.

Also, you will have to pay a processing fee which is over and above EMI charges, starting as low as Rs 199 to the entire amount of discount.

Also, most importantly, because the bank has levied interest on the transaction, you will end up paying 18% GST on interest.

Another trick is to add the interest amount to the price of the product. In that case, you will end up paying more for the product.

What's the way out?
Now, while it is highly tempting, one must be aware of the fact that no-cost EMIs are offered for a fairly short tenure i.e three or six months. Hence the monthly installments will also be high, compared to the with-interest schemes.

So before buying and opting for a 0% interest scheme, you must check comparative prices on multiple platforms, including the offers by stores.

If you are selecting a scheme, you must check the fine print to understand the conditions such as tenure of the EMI, processing fee and pre-closure charges to avoid shouldering a high cost.