Getting a consumer durable loan? Don’t let hidden processing fees and ‘no-cost’ EMI catch you off guard

Easy access to consumer durable loans can be useful for first-time borrowers looking to purchase electronics, appliances or other products while also building a credit history. However, borrowers should look beyond the advertised EMI because the actual cost of the loan can sometimes be significantly higher.

Consumer durable financing can provide formal credit to new-to-credit (NTC) borrowers who may otherwise find it difficult to obtain a loan. Regular repayment of these relatively small loans can help them establish a credit record.

The point-of-sale nature of such loans is another attraction, as borrowers can access financing almost immediately after deciding to make a purchase.

But convenience comes with potential drawbacks. A low monthly EMI can mask a higher overall cost when the repayment period is extended. For a borrower with a limited credit history, even one missed instalment can also have a significant impact on their credit score.

Zero-cost EMI does not always mean zero additional cost

Many consumer durable loans are marketed as zero-cost equated monthly instalment (EMI) schemes, under which the borrower does not separately pay interest.

However, interest rates and promotional structures can differ considerably between lenders and products. More importantly, the interest rate alone does not determine the total borrowing cost.

Before accepting a loan, borrowers should examine processing charges, convenience fees, applicable taxes and any prepayment or foreclosure charges. These additional costs can increase the effective price of the financing.

The advertised EMI should therefore not be the sole basis for making a decision.

Read loan agreement carefully

Borrowers should check whether the loan agreement contains a lock-in period for pre-closure or any charges for settling the loan early.

It is equally important to understand late-payment fees, penal interest and charges that may apply if an EMI payment is dishonoured.

For zero-cost EMI offers, borrowers should establish whether the interest component has effectively been incorporated into the product’s sale price.

They should also compare the EMI price with the price available for an outright purchase. In some cases, choosing a zero-cost EMI scheme could mean giving up a cash discount, exchange benefit or festival-season offer that would have been available on full payment.

Check lender, auto-debit mandate

A basic due diligence check on the lender should be completed before accepting the financing offer.

Borrowers should also avoid providing unnecessary access to their personal data and should understand exactly what information the lender is permitted to collect.

The electronic National Automated Clearing House (e-NACH) or auto-debit mandate deserves particular attention. Check the authorised amount, frequency and validity period and ensure that these details correspond with the agreed EMI amount and loan tenure.

When postponing purchase may make sense

Paying upfront or delaying a purchase may be more sensible if a supposedly no-cost EMI involves significant processing fees or requires the borrower to sacrifice a discount available with full payment.

The same consideration applies to discretionary purchases, particularly products that may lose value rapidly.

Borrowers should also be cautious if a new consumer durable loan would take their existing EMI commitments close to their repayment limit.

Keep total EMIs within manageable limits

As a general budgeting rule, total EMIs across all loans should ideally remain within 40% of monthly take-home income.

This calculation should include every existing EMI as well as the proposed consumer durable loan. Borrowers should use their net take-home salary rather than gross income for this assessment.

Adequate financial headroom should be retained for routine household expenses, rent, insurance premiums and unexpected costs.

Taking another consumer durable loan before paying off a substantial portion of an existing one should also be avoided where possible.

Act quickly if an EMI payment fails

Once a lender sends a notification about an upcoming auto-debit, borrowers should ensure that sufficient funds are available in the linked bank account.

If the debit fails, the borrower should make the payment manually within 24 to 48 hours and proactively inform the lender about the failed transaction.

For a one-time failure, the borrower can request the lender to waive applicable charges. If meeting the EMI obligation is genuinely difficult, a restructuring request should be submitted in writing rather than simply allowing payments to remain overdue.

Prompt action and regular communication with the lender can help borrowers manage repayment difficulties more effectively.

Borrowers should also remember that repeatedly dishonouring payment obligations can have legal consequences, including potential liability under Section 25 of the Payment and Settlement Systems Act, 2007.