- Early closure or returns may incur interest and fees.
Have you ever wondered why pay the full amount upfront when you can pay in instalments at no extra cost? “Zero-cost EMIs” sell you this promise. Visit any e-commerce website or an electronics store, and you’ll find it everywhere.
For the Indian middle class on tight monthly budgets, the deal seems too good to be true. There is a catch.
Zero-Cost EMI: what you’re actually paying
Banks charge interest on EMIs as usual, but in a zero-cost scheme, the seller pays it on your behalf. For the same phone listed online at Rs 15,000, the buyer who pays in cash upfront pays Rs 13,000 due to a Rs 2,000 discount. But if you choose zero-cost EMIs, you pay the full amount of Rs 15,000 in instalments. The Rs 2000 difference is the cost of financing, even though it is not called interest.
The seller, or sometimes the shopping platform, quietly absorbs that cost on your behalf. This practice is called subvention. The bank still earns its interest, but you simply never see the bill. Both buyers took home the same phone. The one who paid cash paid Rs 2,000 less.
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Hidden charges: processing fee and GST
Most banks charge a fee to set up an EMI, usually a few hundred rupees. On top of it is the GST. The fee is deducted at the time of purchase or in the first instalment.
You also pay GST on the interest component. The seller absorbs the interest but not the tax on it. That comes out of your pocket. It is not covered by the “no-cost” label.
Small charges that add up
Even if you want to return the product or close the EMI early, the processing fees are rarely refunded. Some banks also charge a foreclosure fee. In some cases, the merchant reverses the payment it made to cover your interest on your behalf when you cancel or return the product. The bank then puts the interest charge back on you. You end up paying interest on a product you no longer own.
How zero-cost EMIs hurt your CIBIL score
Buyers also do not consider the impact on their CIBIL score. Every time you convert a payment into an EMI, it triggers a hard enquiry on your credit report and increases your credit utilisation ratio. Doing this repeatedly throughout the year can drag your credit score down.
When zero-cost EMI genuinely makes sense
The offer is not always without use. If no cash discount exists on a purchase anyway, you give up nothing by splitting payments. For large essential purchases, EMIs preserve liquidity without meaningful cost. The problem is not the instrument. It is the marketing language that obscures what you are trading.
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Three questions to ask before converting to EMI
1. Is there a cash discount or cashback offer I will forfeit?
2. Is there a processing fee, and what does it work out to annually?
3. Do I actually need this now, or is the EMI option making an optional purchase feel more affordable than it is?
Before your next purchase, run through these three checks.
Zero-cost EMI is not a scam. But zero cost does not mean free. The cost is real, and it has just been moved somewhere you are less likely to look.
