Sunday, May 5, 2013

How exactly does Equated Monthly Installment (EMI) work while shopping online?

So recently, I happened to purchase a new iPad Retina Display from an online store called which is a very famous online store and quite known for its reliable and quality service.

I have been using for quite sometime especially after I had used too much of in the UK, I got really addicted to shopping online after a ton of research and even going in "brick & mortar" store to just test the product but then buy it online for the reason of cheaper price.

However, this is the first time I bought something with EMI (Equated Monthly Installments) as has some offers on certain products where they do not charge any processing fees or interest on EMI option of payment.

All you do is, divide the exact price of the product into 3, 6, 9 or 12 pieces and pay each piece (of total price) every month.

However, this option is only available on credit cards (not all of them!) and not on debit card or general bank accounts, meaning you can't use net banking option or debit cards option if you desire to buy a product on EMI.

So how exactly does EMI work?

When you choose to make payment using EMI option, you put in your credit card details and make the payment in normal fashion, you would even receive sms alert (if you had subscribed for) from your bank that you have been charged for the full amount, however that full amount is not CHARGED instead your credit limit is blocked for that much amount, and each month you make the EMI payment, you limit would be "released", i.e. available for use corresponding to that amount.


So lets take an example, (assuming 0% interest rate)
Before the transaction:
Available Credit Limit: $1000
Cost of product purchased: $350
Purchased at EMI of 10 months.

Hence right after the transaction is made,
(assuming you didn't make any other purchases apart from that one product for $350)
Available Credit Limit: $650 [$1000 - $350]
Amount to pay by next due date: $35 (1st of 10 EMIs)

Once you have paid $35 by the due date,
Available Credit Limit: $685 [$650 + $35]

Hence each month your credit limit releases as the payment is made towards your EMI.

This system is in a way good for several reasons,

  • There isn't any interest to be paid at all.
  • Cash remains in your hand for those purchases where credit cards are not accepted (there are tons of such things in India and other developing countries)
  • Even if you don't use cash for other purchases, it brings you interest in your bank account (deposit account) this is where the concept of discounting comes in where you discount future value to a valid rate of interest to bring it to present value, but thats way too much ahead and doesn't really needed for this topic
  • It builds your credit history as you keep making timely payments, and hence improves your credibility to the banks and financial institutions which you deal with, for example, it might help you reduce your mortgage payments whenever you next time remortgage your house / property.

However there are disadvantages to it as well...

  • Some people just lack the discipline of making timely payments.
  • (May be the most obvious one!) People go on a spending spree and do careless spending which goes far beyond their budget and then end up in credit card debts and so on.
  • The hassle of remembering to make monthly payments (does not apply if you have setup a standing order instruction or direct debit from your bank account)
  • A single non-payment could result in a long time mark on your credit history as an arrear / default, even if that was a missed payment by mistake / unintentional
So if you relate yourself more towards the advantages, look out for these EMI options at your local store or on several online stores or even on your credit card provider's website, however if you relate yourself to disadvantages a lot more than you do to the advantages, refrain for the time being from using EMI payment option and instead first ensure you are disciplined enough with your credit card payments.