# 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% and 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 **yash.info/emicalc** 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.