For the card-swiping customer, it is a useful option if one is unable to pay the entire amount by the due date. On the bank’s part, it helps reduce defaults and gives them an additional interest income.
However, experts advise caution before choosing the EMI option. “Opt for it only if you can’t afford to pay off your credit card dues at one go,” says Naveen Kukreja, co-founder and CEO of Paisabazaar.com, an online aggregator for financial products.
Two most important things that cardholders should keep in mind are the tenure and the rate of interest, says Vijay Jasuja, CEO of SBI Cards. The rate of interest will vary from customer-to-customer and from bank-to-bank. Even for the same customer, it could vary. “The rate of interest is not constant. For instance, the bank might offer you 14 per cent in one month but you choose not to opt for the EMI. Two months later, when you take the EMI route, the rate might be higher.”
The advantage of the EMI option is that you can save on the interest cost on the unpaid amount. If you pay the minimum amount due and revolve the rest, the interest on the remaining amount is very high, at 30-40 per cent. “The rates on EMI option are usually slightly higher than personal loans. Besides, it is convenient as there is no documentation required like it is for a personal loan,” says Jasuja.
The rates for EMI vary between 12 and 20 per cent and the tenures range between three months and in some cases two-three years. The longer the tenure, the higher the interest rate. “It is advisable to go for the shortest possible tenure, but it also depends on the repayment capacity of the customer,’’ says Kukreja.
Another advantage of the EMI option is that often, deals and promotions are funded by manufacturers that can further lower the interest rate, says Deepak Chandnani, CEO of Worldline South Asia and Middle East. “Each bank decides a minimum amount to convert into EMI. This varies from bank to bank and is usually between Rs 2,500 and Rs 3,000. In case of an online transaction, the merchant ties up directly with issuing banks or acquiring banks to offer the EMI facility.”
This is how the EMI option works. Assuming your credit limit is Rs 50,000 and you make a transaction of Rs 15,000 which you choose to pay through EMIs. You will have to pay an instalment every month, which will include the interest rate. In your next billing cycle, your credit limit will be Rs 35,000. Let us assume your EMI is Rs 3,000 for a period of six months. After the first instalment, your credit limit will become Rs 38,000 and gradually it will get restored. Any other transaction has to be paid in full. If you exceed your reduced credit limit, some banks allow the transaction to go through, while others don’t. If the bank allows you to exceed the limit, it will levy a charge for the ‘overlimit account’.
For some transactions, the payment, even though made from the credit card, is not a part of the existing limit. In this case, the credit limit will not reduce. But, the bank will offer it only on a case-to-case basis, depending on your repayment history, says Jasuja. “The EMI option is available on all kinds of cards, but the bank will offer it only if the cardholder has a good track record.”
If you are unable to repay the EMI, then the normal credit card interest rate will apply from the due date, plus a repayment charge, says Kukreja.