The Hidden Cost of Instant EMIs and EMI Conversion

EMIs make it easy and convenient to buy online. But even with EMIs, you have
multiple options. You can opt for Instant EMIs (also called Merchant EMI) directly
on the merchant website. Or you can pay the full amount upfront and later ask your
bank to convert the purchase amount to EMIs. Which option is better?

Option 1: Instant EMI

When I use the words “Instant EMI”, I am referring to the EMI options available
directly on the merchant website. You would see this quite often on Amazon and
Flipkart. While your credit card gets debited with the full amount, the purchase is
automatically converted into EMIs (loan) after 3-4 days. You do not have to send a
separate instruction to the bank. These EMIs are sometimes also called Merchant
EMI.

No-cost EMIs also fall in this category. However, no-cost EMI give you an
impression of zero cost by offering an upfront discount and then charging interest
on the discounted amount. When I refer to “Instant EMIs”, I assume no such relief
upfront discount. So, no discount and regular EMIs. You pay extra money (over and
above the purchase amount) in the form of interest. Instant EMIs are more widely
available than No-cost EMIs. No-cost EMI schemes are usually on specific cards and
for limited periods.

Option 2: Convert to EMI

Conversion to EMI is when you make the full payment on the website and subsequently
ask your bank to convert the purchase to EMIs.

If you are purchasing an item with a clear intent to later convert the payment to
EMIs, then which option is better? Depends on where you pay less. First, let’s look
at the costs.

What Are the Costs?

Depends on your bank.

With some banks, the only cost is the interest cost and the GST (18%) on the
interest component of the EMI. The interest rate for these loans is usually high
and ranges from 13%-16% p.a. However, since these are short term loans (3-24
months), the impact of high interest rates is not very high. Clearly, the shorter
the loan tenure, the lower the impact.

Loan / Purchase Amount Interest Rate Tenure (Months) EMI Total Payment
Total Excess payment (interest) Difference (due to interest rate)
20,000 8% 3 6,756 20,267 267 268
20,000 16% 3 6,845 20,536 536
20,000 8% 6 3,412 20,469 469 474
20,000 16% 6 3,491 20,944 944
20,000 8% 12 1,740 20,877 877 898
20,000 16% 12 1,815 21,775 1,775
20,000 8% 24 905 21,709 1,709 1,793
20,000 16% 24 979 23,502 3,502
As you can see, the impact is not huge despite the doubling of the interest rate
from 8% to 16% p.a.

But There Could Be a Processing Fee

Not all banks charge a processing fee for such transactions, but a few banks
certainly do. And we know that processing can increase the overall cost of credit
for short-term loans.

Take an example of ICICI bank credit cards.

For Instant EMIs (on merchant websites), ICICI charges 199 + GST as processing fee
(irrespective of the amount). For a Rs 20,000 loan, you will be Rs 234 as
processing fee.
For conversion to EMI, ICICI Bank charges 2% of the purchase amount +GST as
processing fee. There is no floor or cap on the processing fee. For a Rs 20,000
loan, you would pay Rs 472 as processing fee.
That’s as much as the difference between 8% and 16% interest rate for a 6-month
loan.

Still, we tend not to pay much attention to processing fees. While I say this,
there is not much you can do about processing fees for online loans. It is non-
negotiable.

Important for Amazon Pay ICICI Credit Card

These charges are applicable to Amazon Pay ICICI Credit Card too.

An important point to note here is that you do not get cashback for EMI
transactions on Amazon Pay Credit card. Therefore, if you are a Prime member and
buy from Amazon on Instant EMI or later convert to EMIs, you won’t get any
cashback. So, you pay a processing fee (199 or 2% depending on EMI mode chosen) and
lose out on cashback too. Account such aspects while calculating your overall cost
of credit.

Let’s say you bought an item worth Rs 20,000 from Amazon on Instant (Merchant) EMI.
You opt for a 6-month EMI. You pay a processing fee of Rs 199 + GST. Plus, you lose
out on cashback worth Rs 1,000.

Purchase Amount = Rs 20,000

Interest Rate = 16% p.a.

Tenure = 6 months

Processing Fee = Rs 199 + GST = 234.82

EMI = Rs 3,491

Cashback lost due to EMI = Rs 1,000 (5% cashback to Prime members)

Effective cost of this loan = 39% p.a. The loan interest rate is still only 16%
p.a. but the cost of credit is now 39%. That’s the impact of processing fee and
lost cashbacks.

If You Are Planning to Buy on EMIs, Consider the Following Aspects

Whether “Instant EMI” or “Conversion to EMI” will be better. You just need to
figure out where you will pay less. The difference between the two can arise for
the following reasons:

Difference in Processing fee

Difference in Interest Rate
Sometimes, the bank can offer different tenure options for the two types of EMIs.
Choose as per your cash flow situation
The impact of lost cashbacks and rewards if you buy on EMIs
A shorter tenure reduces the absolute interest cost impact
Instant EMIs can even be No-cost EMI. Thus, if there is a No-cost EMI offer on your
credit card, this will likely be the best option (even after the processing fee).
You need to evaluate the impact of lost cashback here too
Now, on to the usual caveats. While there is nothing wrong in using credit, you can
get into debt trouble if you are irresponsible. EMIs make purchases quick and
affordable but all debt must be repaid. Before opting for EMIs, ensure that you
don’t overborrow and that your future cash flows will be easily able to support
those EMIs. Also remember, your EMIs don’t have the sole claim over your future
cash flows. You have financial goals and responsibilities too and you must invest
for those goals too. If you borrow too much, you may not be able to invest for
those goals. If that’s the case, you are sacrificing your future for your present.
And that’s not the right thing to do. Keep things simple and small things in mind
while taking credit and buying on EMIs.