No-cost loans: Don’t postpone dues unless strapped for cash

 The Reserve Bank of India (RBI) announced that banks can offer a three-month moratorium on all the outstanding term loans falling due from March 1 to May 31. These include home, personal, education and auto loans. In the personal loan category, there are people who have purchased durables by taking the ‘no-cost EMI’ scheme of e-commerce companies such as Flipkart and Amazon, as well as of retailers selling electronic goods online.

Customers who purchased consumer electronics using the ‘no-cost EMI’ schemes with tenures of six to nine months have started receiving message from financial institutions saying that their equated monthly installments (EMIs) will increase after the pre-decided tenure as per the agreement while purchasing goods, if they opt for the moratorium scheme.

What is a ‘no-cost EMI’ scheme?

No-cost EMI schemes are loan offers in which the buyer of a product or service just pays the selling price of the product in equal instalments, without incurring any interest on the loan. Gaurav Gupta, co-founder and CEO of MyLoanCare.in says, “In this scheme, the interest component is actually subvented by the manufacturer or merchant, either in the form of an upfront discount or as a cashback to the buyer. That subvention is only for the period which is originally contracted as per the agreement made during purchase.” Gaurav says that if you hadn’t opted for the no-cost EMI scheme, you may have got a discount on the product or some sort of cashback. But with a no-cost EMI, such discounts aren’t offered.

For instance, you may have purchased a smart LED television for Rs 1 lakh and opted for a ‘no-cost EMI’ scheme of six months tenure. The total amount to be paid will be the price of the product, split equally across the EMI tenure, i.e., Rs 16,667 for six months. While making online purchases, in particular, you might not even realise that you have not been offered any discount. The manufacturer or the seller would have an arrangement with the lender to pay the interest applicable, without the end-consumer getting involved. This is because the Reserve Bank of India (RBI) does not permit zero percent interest EMI schemes.

Adhil Shetty, CEO of BankBazaar.com says, “When you opt for ‘no-cost EMI’ schemes, depending on the product and the offer, you may not get certain upfront cash discounts associated with them. Else, depending on the issuer and product, there may be an additional down-payment, interest, as well as processing charge involved.”

Here are a few additional questions relating to no-cost EMI schemes that are answered.

How should I apply for the moratorium for a ‘no-cost EMI’ scheme?

The RBI allowed banks and NBFCs to offer moratoriums, but has left the implementation to them. For example, Bajaj Finserv offers a no-cost EMI scheme in partnership with e-commerce websites and retailers. It has asked its customers to write an email to them within five days from the time their EMI has been debited, in case the customer wants a refund by opting for the moratorium scheme. To be eligible for the moratorium, customers should not have more than two EMIs outstanding in any of their loans.

When will I have to pay after opting for the moratorium?

Your EMI will commence from June 2020 onwards. However, the tenure of the loan will increase for two or three months depending on when you opt for the moratorium.

If your EMI commenced from January 2020 and the tenure of the loan was six months, your last EMI would have been due by June 2020. But, if you opt for the moratorium in the month of April 2020 for two months (i.e., April and May), the loan repayment will extend till August 2020.

Do I have to pay interest charges  during the moratorium?

Yes, interest will be applicable on the extended tenure of the loan. This is because the ‘no-cost’ clause is applicable only for six months or nine months as per the agreement signed during purchase. Taking the above example, the interest cost will be applicable on two EMIs, i.e., for July and August.

Shetty says, “The interest rate charged will be in the personal loan range.” For purchasing consumer electronics, the interest rates would be between 12 to 20 per cent.

Will availing the moratorium option affect my credit score?

Your credit score will remain unaffected during the period of the moratorium. Financial institutions will not levy late payment or penalty charges either. In case you default while paying the EMI after the moratorium period ends, then your credit score will be impacted.

Who should opt for loan moratorium?

The moratorium has been announced primarily for providing relief to those who cannot repay their term loans due to the adverse impact of the lockdown. Gupta says, “This no-cost EMI scheme will increase the interest cost for those extending the term of the loan by opting for the moratorium. Existing borrowers who have the ability to continue with the EMI should pay on time to the financial institution.” It will save you from incurring interest expenses on the no-cost EMI loan.