Big Payment in EMIs: Devil is in details

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An expense made on a credit card can these days be converted to equated monthly instalments (EMI). The bank issuing the credit card gives this facility. The seller also provides the customer this option. In both ways it comes with a cost. Knowing and finding out the cost involved is vital for the credit cardholder. Here is a look at the details of these two options.

EMI offer sellers

Often when one goes to a physical store or shopping online for big-ticket items there are offers to convert the payment to smaller ones with equal instalments. The idea behind giving such an option is ensuring that there is no big one-time burden on the individual.

Customers are often persuaded to pay in EMIs to ensure that the purchase is actually made. It is important to calculate the price for the conversion into EMIs. First of all, a customer should know that generally there is a discount if payment is made in one-short. In most cases, this benefit is not available to a customer if he/she chooses the EMI option.

The cardholder should also calculate if the final figure in the case of EMI option is higher than the actual cost or not. This is essential because additional amount is an expense which they can actually be avoided if the payment is made in one-shot. Many times customers are coaxed to believe that there is no cost involved in the entire act of converting the payment to EMIs.

EMI by bank

Credit card issuing bank also gives the option of converting to EMIs. The bank usually calls cardholders and asks them if they want to convert the payment to EMIs. The conversion offer is usually made for large payments and if the cardholder agrees then the whole amount is divided as per the period that is decided for this purpose.

There is one crucial point that needs to be checked at this point of time and this is the application of interest on the amount of the EMI. Often the conversion comes with an added element of interest which is fixed and this is then added to the EMI. So, the figure actually rises as compared to what it would have been in case the overall figure just broken into equal parts.

This becomes the element of the added cost for the individual and they would need to see the rate at which this is levied and then build this into their calculations. On the whole, there is nothing such thing as free lunch in converting large payments into EMIs.

(The writer is a chartered accountant and a financial planner)

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