How does Zero Interest Credit Card EMIs Work?
Go and check for any loan, and you will find that they all come with an interest cost attached. For long term loans like home loans and mortgages, the interest rate is floating and tends to vary on a defined time period, generally every quarter. As opposed to this, Unsecured Loans are provided with a fixed interest rate obligation, which is calculated on a reducing principal amount. The overall cost, however, is much higher than any of the other secured loans.
There is, however, one thing which stands out as an oddity. A number of times Credit Card Companies come with EMI schemes on which the claim can be made at zero interest. In almost all cases, you are actually paying the interest component, only that it is not named as such. Here is how it works.
Merchant is paying the interest component:
Take a look at the many online shopping portals, that claim to offer zero-interest EMI. In the majority of cases, their process is that they will add an extra discount to the product price, and your card is charged at a lesser price. The bank converts this to routine EMI with interest. You will see these schemes on both Amazon India and Flipkart. These schemes are available during “Sale times” and you can choose this on SBI Credit Card or HDFC Credit Card or any other card running the scheme in promotion. The thing is, you do end up paying the advertised price for the product as claimed by the merchant.
The amount of discount offered by your merchant may actually not be equal to the amount the bank will charge. In many cases, the bank will charge a higher interest rate. You will be bearing the difference in interest rates. There is also another point, you have to pay GST on all EMIs. The merchant does not cover the GST charged on each EMI when they give you the interest discount, so that also goes from your own pocket.
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Increased MDR to spread earnings:
Credit Cards are meant for retail purchases. Every time you purchase something, the bank which issues the card will charge the merchant an MDR or a Merchant Discount Rate. This is the fees through which the Credit Card Company earns money on every transaction. If you are smart you must have never carried a balance on your Credit Card. You may never have paid any interest on your card, but the bank has still been earning its fair share. This is MDR. In a number of cases, especially with big online retailers and even offline big box and chain stores, the Credit Card companies start charging a bit extra on their predefined MDR in order to account for missing EMI interest.
Consider this like a case of reverse salami slicing. Instead of charging the interest amount of one customer to their own EMIs, the bank will recover the cost by charging a bit extra to all transactions done on the retailer POS. The merchant will pass down this cost to customers in the long run. Since not everyone who will charge their card, will convert their transaction to EMI, but everyone is being charged extra, it actually ends up good for you if you do convert to EMI but bad if you pay in full at the end of your Credit Card billing period.
Extremely high processing or administration fees:
Every once in a while, you would come across some Credit Card running a scheme asking you to convert any kind of transaction to EMI at a zero percent interest rate. If you do come across any such scheme, always try to read the detailed terms and conditions. In a normal loan or Credit Card EMI, you will be charged around 1 to 2 % of the principal as the processing fee. In fact, many secured loans charge as low as 0.5% or even lower as processing or administration fee.
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If you however read the fine print on these Credit Card Zero Interest EMI schemes, you will notice that they are charging up to 10 % or even higher as the loan processing fees. Similarly, they may also put in some pre-closure fee in case you want to get rid of the EMI earlier because of whatever reason. The difference if you note here is that you have paid all the interest on your EMI at the very beginning. It is best to check with Credit Card helpline to make sure that you are aware of all such charges before jumping on the EMI scheme.
Extremely high interest rate in case of missed EMIs or loan default:
This is another way in which the Credit Card Company can recoup the cost of interest which they forego in zero Interest Credit Card EMIs. The concept is that while your EMI is zero percent, in case you fail to pay your monthly Credit Card bill in full and on time, you will be made to pay the interest amount directly or in the form of penalties. These will be over and above the regular interest charged on monthly balance carried forward, if any. Statistically this is a very good deal for Credit Card companies because they are sure that a number of people will miss EMIs or carry balance at some time or another. The company will easily recover their money through these default charges and will earn a handsome profit on it as well.
When all is said and done, zero interest Credit Card EMIs are a good deal only, and only if you are ready to agree to the fact there will always be some extra charges involved, may be with different names, and no matter what happens, you have to clear your monthly Credit Card bill in full for as long as the EMI is not finished.
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