No-cost EMI: what it really costs, in rupees

How "no-cost" works

A bank cannot lend for free. In a no-cost EMI, the seller or brand pays the interest for you by cutting the price. The bank lends you that cut price, charges its normal interest, and the six EMIs add up to the original sticker price. You never see the discount as cash; it sits inside the loan.

What the seller does not pay for is the GST on the interest (18%) and usually a processing fee.

A ₹60,000 phone over six months

Assume the bank's rate is 15% a year (1.25% a month), the EMI is ₹10,000, and the fee is ₹199 plus GST.

The loan amount is the sum whose six EMIs of ₹10,000 at 1.25% a month repay it exactly: ₹57,460. So the discount, which equals the total interest, is ₹2,540.

Add the fee of ₹199 + 18% GST = ₹234.82.

Total extra paid: ₹457 + ₹235 = about ₹692, or 1.15% of the price.

As an interest rate

That ₹692 is the cost of borrowing about ₹60,000 for six months, on a shrinking balance. Treating the phone as received today and the payments (EMIs plus GST, with the fee upfront) as going out monthly, the effective rate is about 0.33% a month, or 4.0% a year.

Four percent is cheap borrowing. If you would otherwise pull ₹60,000 out of a fixed deposit or liquid fund earning 6–7%, keeping the money there and taking the no-cost EMI is a small gain, before tax on that interest. That is the honest case for these offers.

When it costs more

• You lose a discount. Many sellers offer an instant discount for paying in full by card or UPI that the EMI option does not get. If paying upfront gets ₹2,000 off, the EMI costs ₹2,000 + ₹692 = ₹2,692 more, which works out to about 17% a year on the same basis.
• The fee is higher. Fees of ₹199 to ₹499 are common. On a small purchase, a fixed fee is a large percentage.
• The EMI blocks your card limit. The whole amount is blocked at once and released as you pay.
• A missed EMI. Late fees and the card's standard rate, often 3.5% a month, replace the promotional deal. See what credit card interest really costs.
• Flat-rate offers dressed as EMI. Some store finance quotes a flat rate rather than one on the reducing balance, which is about twice as expensive as it sounds. See flat vs reducing rate.

A quick check before you tap

1. Ask the price for paying in full today, with every discount.
2. Ask the processing fee.
3. If the full-payment price is the sticker price, the EMI costs you roughly 1–1.5% of the price over six months. Decide whether keeping your cash is worth that.

Reading this

• The 15% bank rate, ₹199 fee and ₹60,000 price are assumptions; card issuers' terms differ.
• Interest is on the reducing balance, with GST charged monthly on each month's interest.
• The annual rate is the internal rate of return of the cash flows, compounded monthly.