It’s boom-time for retailers and banks after a low season in 2020. Buy Now, Pay Later schemes extend the feast to both consumers and retailers. Popular on-line shopping sites like Amazon and Flipkart are holding mega-sales events and the words you hear being bandied about are Debit Card EMIs and No Cost EMIs.
Sounds tempting? Who doesn’t want a grand celebration this year after remaining indoors and unsociable for a long time? Financial position is low? No hassle. You can buy now and pay later with many financing options being offered.
Let us be clear about a fundamental fact before we get on the roller-coaster with retailers and financial institutions.
Reserve Bank of India has banned Zero-cost EMIs in 2013.
DEBIT CARD EMI
This is a loan facility provided by a bank without having to apply for a credit card or personal loan to select customers.
The mechanism is different. The bank debits the entire amount of purchase from the account. A loan account is created and the amount is credited back in 2 days.
Banks charge interest in the range of 14%-16% on this, which is almost equal to that on a personal loan. Credit score is checked while deciding eligibility of a customer to avail of this facility.
Some banks may charge processing charges, applicable charges if auto-debit fails, and foreclosure charges. GST is applicable on the amount paid.
Some banks may also insist on the customer having a fixed deposit of equivalent amount with the bank. Effectively, it works as an overdraft against fixed deposit, for a specific purpose.
The term No-Cost EMI is a misnomer, since the amount of interest is adjusted in the price of the product.
There is a discounted price and an actual price of a product. You can buy the item with an upfront payment at the time of purchase, at the discounted price. If you avail of EMI option, you pay the actual price.
If the actual price is Rs.30,000/-, and discounted price is Rs. 24000/-, the difference of Rs. 6000/- is the interest that you pay on the purchase.
The term No-Cost EMI is used since there no processing charges or account-opening charges involved here.
EMI cards are a pre-approved loan given by a non-banking finance company. It is a pre-loaded card which can be used to buy specific products, and the amount repaid in EMIs to the NBFC.
The interest which the NBFC earns is baked into the price of the product by the merchant.
FINTECHS OFFERING BUY NOW, PAY LATER SCHEMES
Fintechs pay the bill instantly, and provide a credit period of 15 days to a customer to repay the amount. The names that instantly jump to mind are LazyPay and Simpl. However, there are many more.
In case the payment is delayed beyond 15 days, interest is chargeable.
WHY DOES A MERCHANT OPT FOR GIVING NO-COST EMI FACILITY?
- The facility is available on select stocks, which the seller wants to dispose off fast.
- It boosts sales as buyers who cannot afford the product are able to buy it.
Merchants may pass on the interest paid to the bank as a discount at times.
Discounts are not applicable in case of default in EMI payments.
WHAT DOES THE BANK GAIN?
- The bank is giving a loan with less paperwork.
- They earn by way of interest and charges.
- They acquire new customers who are interested in availing this facility.
WHY ARE FINTECHS IN THIS BUSINESS?
Fintechs are working on thin margins as of now. They earn money only when a customer is unable to repay the amount in the specified ‘free window.’
The idea is to inculcate a habit of availing credit in millennials, and onboard them on credit bandwagons.
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HOW DOES THE CUSTOMER BENEFIT?
- Customers are able to buy something even when they cannot afford to pay the price upfront.
- They don’t have to visit a bank to avail of the facility.
- They need to pay the full amount on due date, if they use a credit card. In this case, they get a period of 3-24 months to repay the amount.
However, the cons are more than the pros.
- a higher price on the product.
- GST on instalments paid.
- processing and foreclosure charges in some cases.
- interest even if the product you purchased is not satisfactory, and you seek a refund by returning it.
- In case of a debit card EMI you need to have the full amount in your account at the time of purchase.
DOES FAILURE TO REPAY AFFECT YOUR CREDIT SCORE?
In general, credit scoring agencies do not check debit card transactions. Hence, positive financial behaviour displayed by making timely payments does not help the credit score.
But a failure to repay may have an adverse impact on credit score, as the amount of purchase is transferred to a loan account.
ARE CREDIT CARDS ON THE WAY OUT?
It is too early to comment on that. A credit card can be swiped anywhere, while BNPL options are limited to a specific purchase.
Responsible use of credit cards helps in building a good credit score for the first time borrower.