What is EMI & How does No-Cost EMI work?
EMI, or Equated Monthly Installments, is a mode of repaying a loan where the borrower pays back the loan amount in equal monthly installments over the tenure of the loan. This article will explain what it is, how it works, and how No Cost EMI works.
What is EMI?
An EMI, or Equated Monthly Installment, is a type of loan repayment in which the borrower repays the loan amount in equal monthly installments. Hence, the advantage of an EMI is that it allows the borrower to spread out their repayments over a longer period of time, making it more affordable.
No-cost EMI is an option where the borrower does not have to pay any interest on the loan amount. This makes it even more affordable for borrowers who are looking to finance a purchase.
How does it work?
Equated Monthly Installment is a fixed amount of money that you pay every month towards the repayment of your loan. The monthly installment includes a portion of the principal amount and the interest charged on the outstanding loan amount. The exact composition of your EMIs depends on the type of loan and the interest rate applicable.
No Cost EMI is an offer wherein you can avail EMIs at zero additional cost. In other words, you only pay the principal amount borrowed and no interest is charged on the loan amount. Therefore, this offer is usually valid for a promotional period after which regular EMIs with interest will be applicable.
How is an EMI calculated?
Equated Monthly Installment, is the fixed amount of money that a borrower must pay each month to repay a loan. The monthly payment consists of both principal and interest and is typically paid by automatic debit from the borrower’s bank account.
The principal is the original loan amount, while the interest is the cost of borrowing the money. Resultingly, the interest rate is usually a percentage of the principal and is charged as a fee for borrowing the money.
EMIs are calculated using a simple formula:
EMIs = P x r x (1+r)^n/((1+r)^n – 1)
P = Principal loan amount
r = Monthly interest rate (in decimal form)
n = Total number of payments (months)
For example, if you take out a loan of Rs. 1 lakh at an interest rate of 10% per annum for 3 years (36 months), your EMI will be Rs. 3,027 per month.
What is a No-Cost EMI?
In India, a No-Cost EMI is an equated monthly installment plan offered by banks and financial institutions on consumer durables, electronics, and other big-ticket items. Thus, it allows customers to purchase these items in easy monthly installments without having to pay any interest or processing fees.
How does a No-Cost EMI work?
Assuming that you are referring to the No-Cost EMI option available on some credit cards, here’s how it works –
When you opt for a No-Cost EMI, the bank pays the interest on your behalf to the merchant. This means that you effectively pay only the principal amount (the price of the product) during the tenure. Since there is no interest component, there is no cost involved.
However, this benefit is usually available only for a certain period of time (usually 3-6 months). After that, you will have to pay interest on the entire amount if you continue to avail of the facility.
What is the advantage of a No-Cost EMI?
A No-Cost EMI is an interest-free loan that allows you to pay for your purchase in monthly installments. Thus, it means that you will not have to pay any additional interest on your purchase. The advantage of this is that it automatically becomes a more affordable option.