Cashbacks and no-cost EMIs may be lucrative, but it pays to be careful

• One should read the terms and conditions of cashback offers and no-cost EMIs carefully to ensure a clear understanding of the total cost.
• If you use a significant portion of your credit limit for multiple no-cost EMI transactions, it may negatively impact your credit score.
• Failure to make a timely EMI payment or missing it can result in a decrease in your credit score.

Nowadays, you can get anything on an equated monthly instalment or EMI. While traditionally, people bought homes and cars on EMIs, where you pay monthly instalments with added interest essentially, now you can avail an EMI to buy the latest iPhone or an earpod which costs as less as ₹2,000.

One may go for an EMI when one does not have the money to pay up front. However, Delhi-based Dipayan Chatterjee could have paid ₹66,000 to buy a phone, but he was told that there was a cashback offer of ₹6,000 on the certain debit card and he could pay the rest ₹60,000 in three EMIs of ₹20,000 each. That seemed a good deal for him because he was saving ₹6,000 and paying the money over three months instead of one.

The question here is, when you are getting an option to break your payment into EMIs and also some attractive deal with it like a cashback, should you go for an EMI even if you can pay the entire amount up front? If something is too good to be true, is it true? We take a look.

Check the actual savings on no-cost EMIs

If a cashback or a no-cost EMI is the reason why you are going for an EMI even though you can afford to pay up front, you need to be careful. “You should carefully read the terms and conditions of cashback offers and no-cost EMIs to ensure that you have a clear understanding of the total cost you'll be paying,” says Rajiv Das, CEO of i-Loans at LoanTap,a personal loan app.

If it is a cashback, find out very clearly how it works. Cashbacks may be offered as a discount on the product purchased, deposited into the bank account, be credited to the credit card statement or be given as a gift voucher which can be redeemed at specific retailers.

In Chatterjee’s case, the MRP was ₹66,000 and since he was being offered an EMI of 3 months on ₹60,000, the cashback was visible up front. If it is not clear how it is applied or if you do not need the gift voucher you are being offered, a cash back may not make sense for you.

When you choose to pay using EMIs instead of a lump sum, there are some charges that we may not be aware of in the initial stages of the purchase. These can be in the form of a processing charge, EMI conversion fee or applicable taxes. These fees can be a one-time charge or occur with each EMI payment, and can add to the overall cost of your purchase.

Impact on your credit score

Opting for "no-cost EMI" options typically should not have a direct impact on your credit score. Some financial institutions may perform a hard inquiry or credit check when you opt for a no-cost EMI option, which can have a minor impact on your credit score. Multiple hard inquiries in a short period can potentially decrease your credit score, but the impact is generally small.

Each time you use a no-cost EMI option, you are effectively using a portion of your available credit limit on your credit card. If you use a significant portion of your credit limit for multiple no-cost EMI transactions, it can increase your credit utilisation ratio, which may negatively impact your credit score. Credit bureaus typically recommend keeping your credit utilisation below 30% of your available credit limit.

Beware of payment(s) failure

Repaying in instalments doesn't necessarily alleviate the financial responsibility. You're still required to make monthly payments, and handling multiple such payments can lead to an increased monthly financial commitment for debt repayment, potentially disrupting your budget.

“Moreover, while your credit score isn’t checked when you apply for the loan, once the loan is underway, the lender is mandated to report it to the credit bureau. So, if you default on these loans, your credit score will also take a hit,” says Adhil Shetty, CEO, BankBazaar.

Failure to make a timely EMI payment or missing it can result in a decrease in your credit score and may also lead to additional penalties being imposed on your EMI. Missing out on EMIs can thus affect your credit score and mean that you are not eligible for such offers in the future.

So, always take a hard look at cashback and no-cost EMI offers and only go for them after being sure of what you are getting into.