Due Diligence. When EMIs make it easy

You just bought a large-screen television on your credit card. And you then got a call from your card company offering to convert that expense into a loan. Should you opt for it?

An EMI option is available on a specific credit card bill item and not the whole bill. It kicks in once a purchase crosses a certain threshold amount, usually ₹2,500-5,000. The option allows you to pay off your bill in parts, just like a loan, with the interest built into the EMI payment.

The interest charged varies across banks. For example, ICICI Bank charges 13 per cent interest on reducing basis on three, six, nine and 12-month EMI transactions and 15 per cent (on reducing basis) on 18- and 24-month EMIs. It compares favourably with the interest rate charged on outstanding and unpaid credit card balances. ICICI Bank charges 3.4 per cent per month on outstanding balances. Interest rates on unpaid credit card balance can be as high as 44 per cent a year. There may, however, be processing charges on conversion into loan. At Axis Bank, for example, the processing fee is 1.5 per cent of the transaction amount or ₹150, whichever is higher, while the processing fee is 2 per cent of the transaction amount in the case of SBI, subject to a minimum of ₹199 and a maximum of ₹1,000. Education cess and service tax also apply.

Take, for instance, a ₹50,000 transaction made on an SBI Gold card. Using its six-month EMI option results in a monthly payment of ₹8,554, working out to a total of ₹51,825 (including ₹500 processing fee). But suppose you didn’t take the EMI option and instead paid a higher sum of, say, ₹10,000 a month for five months.

The total amount you would pay works out to ₹53,850 (accounting for the 20-50 day interest-free period), higher than the EMI amount.

This is owing to the wide gap between interest rates charged in the EMI scheme and that charged on outstanding credit card balance, which holds true for almost all credit cards. So, when there are one or two high-value purchases skewing the bill, choose the EMI option. Or go for EMIs when you find it hard to meet your entire payment, as the threshold of transaction amount triggering conversion is relatively low.

Use freely available online EMI calculators to check the amount you will be paying under the EMI route. Compare it with what you will be otherwise paying on your outstanding credit card balance to arrive at a decision. This is especially important when you can afford to pay off a sizeable chunk of the dues or when you are only temporarily short of cash, and are able to meet higher payments in a couple of months.

But keep a few points in mind. First, the entire purchase amount on your card is blocked even if you have smaller EMIs to pay every month. Second, foreclosure charges are levied by most banks in case you wish to end an EMI prematurely. This could be as much as 2-3 per cent of the remaining principal amount after accounting for EMIs that have already been paid.

Third, EMI schemes are not applicable on all purchases: for example, jewellery purchases are not permitted on an EMI basis. For very large purchase amounts and depending on the bank, taking a personal loan to pay off the credit card amount may also be looked into.

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