Credit-card EMI isn't always cheaper: Check these six costs before converting

A credit-card bill can become easier to manage when converted into an EMI, but a lower monthly instalment does not necessarily mean lower borrowing costs. Consumers should assess the complete repayment burden before converting an outstanding balance.

For a ₹1 lakh credit-card bill, the first question should be whether the consumer can pay the entire amount by the due date without disrupting essential expenses, emergency savings or other financial commitments. Paying the bill in full can avoid interest and EMI-related costs. However, carrying the balance as revolving credit can be significantly more expensive.

At a finance charge of 3.75 per cent a month, interest on a ₹1 lakh outstanding balance could be around ₹3,750 in the first month, subject to the card issuer's terms and applicable taxes. By comparison, a nine-month EMI at 1.75 per cent a month on a reducing balance would result in an instalment of about ₹12,106 and total repayment of roughly ₹1.09 lakh, before processing fees and applicable taxes.

Don't compare only the monthly interest rate

However, consumers should not compare only the two monthly interest rates. Kumar Binit, CEO, airpay money, said customers should first determine whether the quoted rate is calculated on a reducing balance or in another manner and then assess the annualised cost and total amount payable.

“The customer must calculate and add up everything they will pay over the entire EMI tenure,” Binit said, pointing to the principal, total interest, processing fees, GST and other applicable charges. He also advised consumers to examine pre-closure terms, as a longer tenure may make the monthly instalment look smaller while increasing the overall repayment.

Six costs to check before converting

The six key factors to check are the interest rate, processing fee, GST, tenure, pre-closure or foreclosure charges and total repayment amount. Consumers should also check whether the EMI blocks part of their available credit-card limit.

Partial payment

Making a partial payment upfront can further reduce the borrowing cost. For example, converting only ₹60,000 of a ₹1 lakh bill into EMI after paying ₹40,000 upfront means interest is charged on a smaller principal, assuming the same rate and tenure.

Ankita Patel, CFP and Founder of Wealtheria, said the reduction in the amount converted can make a meaningful difference to the overall interest burden.

Patel said a credit-card EMI can make financial sense for a one-time, planned expense when the consumer has sufficient income to clear the debt within six to 12 months. But repeatedly converting bills while continuing to spend on the card can merely postpone the underlying debt problem.

“Take a ₹1 lakh bill converted at 16% a year for 12 months, with a 1.5% processing fee and applicable GST. The total cost is about ₹12,245. If you pay ₹40,000 upfront and convert only the remaining ₹60,000 into EMI, the cost falls to about ₹7,347 — a saving of nearly ₹4,900. Before choosing between a credit-card EMI and a personal loan, consumers should compare the effective annual interest rate rather than the quoted ‘flat’ rate, along with processing fees and foreclosure charges. They should also account for the 18% GST applicable to credit-card EMI interest and check whether the EMI blocks part of their available credit limit. ‘My rule is simple: borrow for a purpose, never for a habit. If your EMIs keep piling up, it is time to review your debts properly,’ said CFP Ankita Patel, Founder, Wealtheria.”

Compare EMI with a personal loan

Before choosing between a card EMI and a personal loan, consumers should compare the effective annual borrowing cost, processing fees, GST, prepayment or foreclosure charges, tenure and total repayment. The decision should be based on the overall cost rather than the size of the monthly instalment alone.