How moratorium will impact you in case of no-cost EMI
New Delhi: The Reserve Bank of India last month extended the moratorium on term loan repayment by another three months till August 31. With this extension, borrowers can now avail six-months moratorium on loan repayment from March 1, 2020, to August 31, 2020. This moratorium is applicable to all term loans including home loan, personal loan, car loan and credit card dues also. However, what about no-cost EMIs?
Nowadays, people often opt for no-cost equated monthly installments (EMIs) when they buy stuff either offline or online. If you have bought a product and are paying your EMIs, you are also eligible for a moratorium. If you no-cost EMI, you must remember that you may end up paying a very high rate of interest on your outstanding loan amount if you opt for this moratorium facility.
Should people with no-cost EMIs opt for loan moratorium?
Pankaj Mathpal, Managing Director at Optima Money Managers Pvt. Ltd explained saying, “In general, when the products are sold under no-cost EMI, the interest is borne by the seller. It is a subvention scheme. The seller is able to increase the volume of sales by giving an easy payment option to the buyers. The buyer has to repay the amount within the given time. Now, in case customers avail moratorium for a few months, they will have to pay the interest for that as neither the seller will bear the interest nor banks will wave it off.”
Interest is applicable for the no-cost EMI consumer durable loans too for this moratorium period. Customers will be communicated on the interest applicable for your moratorium request. The interest rate charged on these EMIs will be in the personal loan range. For purchasing consumer electronics, the interest rates would be between 12 to 20 per cent.
Bajaj Finserv, one of the leading players in the consumer durable loan space, has already informed customers that they have to pay 24% p.a of the outstanding amount on no-cost loans. The recovery of the interest will be done by increasing the loan tenure.
This means that say you have bought a product worth Rs 60,000 and are paying Rs 5,000 as an EMI. Suppose you have three months left and you have opted for the moratorium facility. Then you will be charged interest at the rate of 24% per annum on the outstanding amount of Rs 15,000(Rs 5,000×3) meaning you will have to pay nearly Rs 918 extra on the outstanding loan amount of 15,000. Opting for the moratorium would increase the cost of your product which is why it is advisable.
No-cost EMI gimmick:
If you think no-cost EMIs help you save money, you are mistaken. As per a Reserve Bank of India (RBI) notification, the zero per cent or no-cost interest schemes are more of a marketing gimmick and the interest cost is passed on to the customers. The RBI notification dated, September 17, 2013 states “In the zero per cent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to the customer in the form of processing fee. Similarly, some banks were loading the expenses incurred in sourcing the loan (viz DSA commission) in the applicable RoI charged on the product.”
This is offered on select products and bank credit cards. In case you do not have a credit card of the relevant bank, you will not be eligible for a no-cost EMI deal. Often, goods under this scheme are offered when they wish to clear the inventory. If you analyse the offers, you will notice that zero-cost EMI will have a processing fee or you have to pay total interest on the EMI. The no-cost EMI is just like a normal EMI, the only difference between the two is that you do not have to pay the interest along with the principal.