Converting credit card purchases to EMIs often hides extra costs like processing fees and GST. These charges make the total repayment higher than the original cost. Before choosing an installment plan, consumers should calculate the total payout and check for pre-closure penalties to avoid unnecessary debt.
Credit card issuers frequently offer the option to convert large purchases into Equated Monthly Installments (EMIs). While this provides immediate cash flow relief by spreading payments over several months, it often hides the actual cost of borrowing. Many consumers focus only on the monthly outflow, overlooking the total amount paid, which can be significantly higher than the original purchase price.
The True Cost Beyond Interest
The most common mistake is ignoring the layered fee structure. Beyond the interest rate charged by the bank, most card issuers levy a processing fee on the principal amount. In India, this processing fee is a service, meaning it attracts an 18% Goods and Services Tax (GST). For example, if a bank charges a 2% processing fee on a purchase, the customer pays 2% plus 18% of that fee as GST. When this compounded cost is added to the interest payments, the actual Annual Percentage Rate (APR) or the true yearly cost of the loan often surprises borrowers who only considered the headline interest rate.
The 'Zero-Cost' EMI Reality
Retailers and banks frequently advertise 'zero-cost' EMI schemes. In these plans, the interest is technically zero for the customer. However, this is often not truly free. In many cases, the interest cost is baked into the product price. By choosing a 'zero-cost' EMI, the customer may lose out on other available discounts, such as cash-back offers or direct price reductions that would apply to a full, one-time payment. This effective 'hidden' interest is paid via the higher purchase price.
Foreclosure and Flexibility Risks
Another critical factor is the pre-closure penalty. Life circumstances can change, and a borrower might come into money and wish to pay off their EMI debt early. Banks often impose a foreclosure charge for this, which can range from 1% to 3% of the outstanding principal. This penalty can effectively lock the borrower into the original, longer tenure, as the cost of closing the loan early might outweigh the savings from stopping the interest payments.
Debt Management and Credit Score
The most significant danger for credit card users is the psychological trap of feeling wealthier because the monthly EMI payment is small. If a cardholder converts a large purchase to an EMI but continues to swipe the card for new expenses, they risk filling up their credit limit. Maintaining a high credit utilization ratio—where the total debt is close to the credit limit—can negatively impact a credit score. Users should calculate the total liability of an EMI plan compared to their monthly income and essential costs before deciding to convert, as this is often more expensive than settling the credit card bill in full each month.