No-cost EMI vs upfront payment: When does buying on instalments make sense?

 

With festive sales offering no-cost equated monthly instalment (EMI) schemes on smartphones, televisions and home appliances, consumers may be tempted to spread payments over several months rather than pay the entire amount upfront. However, the absence of an advertised interest charge does not necessarily make an EMI deal the cheapest option.

The decision should depend on the final amount payable, discounts available on upfront purchases, additional financing charges and whether retaining the money offers a meaningful financial benefit, according to Kundan Shahi, founder and chief executive officer of Zavo, and chartered accountant Rohit Saluja.

Compare the effective cost, not just the EMI

Consumers should compare the total cost under both payment options, including processing fees, goods and services tax (GST) on applicable charges, any interest component and discounts forfeited by choosing instalments.

Saluja illustrates the difference using a smartphone priced at ₹60,000. If a no-cost EMI attracts a ₹500 processing fee plus GST and the buyer gives up a ₹3,000 upfront discount, the effective EMI cost comes to ₹60,590, against ₹57,000 through upfront payment. The difference is ₹3,590.

Such costs can outweigh the convenience of spreading payments, particularly when retailers offer additional discounts for immediate payment.

When can no-cost EMI make sense?

No-cost EMI may be worth considering when the product's price remains the same under both payment options, additional charges are minimal and the consumer has a clear reason to preserve cash.

Shahi says instalments can be beneficial when the financial value of retaining money exceeds the processing fees, taxes and discounts lost through financing.

Consumers with sufficient savings may prefer to retain their money for emergencies or leave it in an interest-bearing savings account or investment fund while paying instalments from their monthly income. However, returns on the retained money must exceed the additional cost of the EMI for the arrangement to deliver a financial advantage.

The calculation should also account for taxes on investment returns, where applicable, and the timing of instalments. Market-linked investment returns are not guaranteed and should not be treated as certain gains.

Liquidity versus debt

Preserving cash can be valuable for households that want to maintain an emergency fund for medical expenses, job loss or other unexpected costs. Paying upfront may reduce savings to an uncomfortable level, making an EMI option worth considering even if it carries a modest additional cost.

However, consumers should not choose instalments merely because the monthly amount appears affordable. Multiple EMIs can accumulate, restrict credit availability and leave less money for essential expenses and regular savings.

Check the fine print before signing up

Before opting for no-cost EMI, consumers should verify the total payable amount, tenure, processing fees, applicable taxes, foreclosure charges and penalties for missed payments. They should also check whether the offer requires a particular credit card or excludes discounts available on upfront purchases.

Ultimately, no-cost EMI makes financial sense when the additional cost is justified by the value of retaining liquidity and repayments fit comfortably within the household budget. If an upfront discount is substantial and paying immediately leaves emergency savings intact, upfront payment may be the more economical choice.