Kotak Mahindra Bank recently allowed all its debit card customers to buy almost anything – at offline and online stores – across the country, on equated monthly instalments (EMIs). On the bank’s website, the Smart EMI scheme is mentioned as a ‘No cost EMI*’. That small star mark points to a footnote that says the interest cost is borne by the merchant or the establishment where you make the purchase.
Other large banks like ICICI Bank, HDFC Bank and SBI also have this facility for their debit card holders who are eligible or approved. Each bank has its own terms and conditions that apply.
What Kotak Bank doesn’t tell you
Now, you might think that you are getting a good deal here, at no cost. In reality, any form of EMI is a loan and there are costs attached.
Debit card loans are perhaps even worse than credit cards. While you can choose the EMI tenure of 3, 6 or 12 months, if you are unable to pay in that defined period interest charges start to kick in from the very next day. In case of a credit card, you get 50 days of credit upfront; for debit card-linked credit, even though the EMI period can be longer you are using money lying in your bank account.
Remember, a debit card means that you get to swipe only what is there in your account. By offering the EMI facility on your debit card, the bank allows you to enjoy credit on a debit card.
Too many EMIs may reduce your affordability
According to the bank’s spokesperson, it increases the affordability for consumers by giving them the ability to pay in small and easy instalments. This is not entirely true.
Your affordability goes up, only if you have more money or if the price of what you wish to buy, drops. Neither is happening here. But the opposite might happen: you might end up buying more than what you can afford, because you are lulled into it, thanks to only small amounts being deducted every month.
According to Sonesh Dedhia, co founder at IFANOW, “In case of debit cards such a facility can benefit if you have the funds in your bank. One has to be careful to use it only for unavoidable, large sized purchases, rather than considering it as a limitless spending tool.”
Sample this: you want to buy a television set worth Rs 50,000 and don’t have enough saved up in your bank. Nor do you have any surplus in your investments to pay the entire purchase amount. The EMI facility is enticing and you swipe your debit card to buy the television. You are eligible for zero down payment, and you choose a repayment period of 15 months and, as a result, have to pay only Rs 3,333 a month. Now this looks affordable. A month down the line, you may consider upgrading your refrigerator on this scheme and that adds another EMI of Rs 3,000. It’s great you can buy more for less.
This false sense of affordability may lead you to not only buy things you don’t need. It may get to a point where you can no longer pay all the EMIs in a month.
According to Kotak Bank’s spokesperson, “Post the pandemic, especially, we have seen a greater demand for this facility. In times of uncertainty, customers are reluctant to make one-time payments for high-value purchases and prefer making staggered payments. That does not make it a debt trap. Our experience has shown us that the vast majority of our customers (over 95%) know exactly what they can afford and are very disciplined in their repayments and have a clean repayment track record.”
The objective of offering this facility is to reach those who are not eligible for credit cards and to extend access to credit to this part of the population. Ultimately, the onus of being responsible about using credit is on you. If you are unable to curb your behaviour towards adding unnecessary credit, the real cost of spending through your debit card and converting it into EMIs will show up as overspending and piling up of debt.
The charges you cannot ignore
For any no-cost EMI scheme, there are always charges that more than make up for the absence of upfront interest costs. From late payment fees to high interest on delayed payments to charges for getting a statement issued, there are many levies. You have to sift through the details to find these charges rather than relying on what the brochure has to say.
In the case of the Kotak Smart EMI, the additional charges span a wide range. Converting your debit card spend to EMI payments is akin to taking a loan. Credit scores become important. As a result, there is a processing fee of anywhere between Rs 99 and Rs 2,999, depending on the individual, the bank and the purchase amount.
There are also penal charges if the amount becomes overdue. This is charged at 3 percent a month, translating to an interest cost of 36 percent a year. This is as high as credit card overdue charges. Moreover, if the EMI bounces or you have insufficient funds in your account, there is an additional charge of Rs 750.
You cannot prepay or foreclose the loan before at least three EMIs are completed. Other charges include, statement of account charges (a physical statement), repayment schedule charges (a physical statement) and EMI bank swap charges which range from Rs 250-Rs 500.
Nothing in this scheme suggests that it will help you manage your money better. On the contrary, it may entice you to spend more, leading to a debt trap that only benefits the bank receiving the interest charges on late payments.
Stay away from such schemes. Buy only what you can afford and use your debit card as a tool of convenience rather than as one that makes you take on unnecessary loans.
The original piece has been modified to incorporate Kotak Bank's spokesperson's comment and the fact that other banks also offer such products, albeit selectively.
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