The real cost of Zero interest EMI on credit cards

Many banks offer zero interest EMIs on credit card transactions. They apparently don’t charge any interest but only take a one time processing fee which looks to be very reasonable.

Say you bought something for 6000 on a credit card and bank offers you an interest free option of paying it back in six months with a one time processing charge of Rs. 70 per thousand. Do you think its a good deal? 70 per 1000 doesn’t look like much although if you calculate you would see that its 7%. So on a 6000 sum your processing charges will be Rs. 420. You pay 420 up front and then pay 1000 every month. So 7% looks like the rate of interest that company charged you isn’t it? Even though they say its zero interest.

Wrong. Nothing comes for free. And there’s no such thing as a free lunch and no such thing as zero interest loan. And you think you just paid 7%? That looks really low compared to home loan rates of 11.5%, auto loans of 12%, personal loans at 24%. Lets calculate the real rate of interest you actually paid.

Remember you paid 7% for using 6000 for six months. So on a per annum basis the rate of interest comes out to 14%. But its not really 14% either because you are paying the interest in advance. Not unlike a typical loan where you pay the interest at the end of each month AFTER using the money for that month. Here you are paying the processing fee BEFORE using the money. You paid 420 on 6000 and you will still pay 1000 every month. In effect you only got to enjoy 5580 in the first month. And on that principle amount you will be paying an EMI of 1000 per month.

Using the Interest rate calculator at you will see that a loan of 5580 for 6 months where you pay 1000 EMI is having a rate of interest of 25.36%! That’s the real cost of the supposedly zero interest EMI scheme on the card.

PS: How clever are the banks to disguise a 25% rate of interest in sweet words like Rs. 70 per thousand. They don’t even say Rs. 7 per 100 because that “sounds” too much. Anyone can instantly calculate that 7 per thousand is 7% but 70 per thousand doesn’t really sound like that much.

However Kotak Mahindra Bank is having a genuinely zero charge EMI option for three months where they don’t charge interest or processing fees. And so do ICICI, Citibank and HDFC for transactions on eBay (For 3 EMI option only). I have tried them and I know they are genuine zero charge but all those 6 months, 9 months are just hogwash.

Edit: Kotak has withdrawn the 3 months, zero charge, zero interest EMI option, however almost all major eCommerce vendors now have tie ups with credit card providers to offer 3 months zero charge EMIs. ICICI, HDFC and Citibank seem to be available on every major site.

The real cost of Zero interest EMI on credit cards
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