Many banks offer zero interest EMIs on credit card business. They apparently don’t charge any interest except only take a onetime processing fee which looks to be very sensible.
Say you buy great for 6000 on a credit card and bank offers you an interest free alternative of paying it back in six months with a onetime processing charge of Rs. 70 per thousand. Do you think it’s a good transaction? 70 per 1000 doesn’t look like much although if you calculate you would see that its 7%. So 6000 sum you’re 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 aren’t it? Even although they say its zero interest.
Incorrect. Not anything comes for free. And there’s no such craze as a free lunch and no such thing as zero interest loan. And you think you just paid 7%? That looks actually low compared to home loan rates of 9.25%, car loan of 12% and personal loans at 11.49%. Let’s work out the genuine rate of interest you in fact salaried.
Keep in mind you paid 7% for using 6000 for six months. As a result on per annum base the rate of interest comes out to 14%. But it’s 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.
Finheal is writing blogs and articles on finance category.