” While on one hand EMIs have led to an increase in e-commerce and given the common man the power to afford, on the other hand, it has curtailed financial freedom and posed a debt burden.”
While the world is acquainted with the concept of Equated Monthly Instalment and all of us are lured by the benefits of it, we are aloof to the reality which lies in front of us.
All companies across the globe have witnessed an increase in consumerism. E-Commerce platforms have reaped the benefits of the EMI scheme. Companies like Amazon, Flipkart, and Myntra have witnessed a magnanimous spurge in the number of sales and a large portion of it can be attributed to purchases by customers on EMI. Times of India in an article stated that EMI adoption in 2019 rose by 84% in tier 1 cities, 140% in tier 2 towns, and 145% in tier 3 towns.
The graph is an accurate representation of the increase in the order value. EMIs and other credit financing instruments have allowed people to increase their “cart value” while necessarily not changing the quantity of items bought.
For example, if you were on the lookout for some headphones and you were scouring through Amazon on the lookout for some Boat Headphones within a price range of Rs 5000 but now you see an exclusive deal from Samsung offering headphones at 7,000 at an EMI of 500 per month for 14 months at 6% interest. Your brain immediately thinks that you can easily afford to pay 500 per month and before you know it you have placed an order for the Samsung headphones. To take this into perspective, not only did you spend an extra amount of money but you have also taken on a load of interest that comes along with the EMI. So in essence, the very thing which makes all products more affordable also is to blame for drowning consumers in debt.
As soon as you purchase something on a credit card with an EMI option your card’s available credit limit is reduced by the total cost of the goods or service. The EMI on credit cards then works much like a home loan or a personal loan: You pay back the principal and interest each month, gradually reducing your debt over some time until you pay it off in full. Hence, this has led to an outburst of E-commerce sales using credit cards and an EMI option.
India has witnessed an increase in not only the average order value of sales but also a rise in the volume of e-commerce sales and a huge chunk of it can be considered the contribution of EMI schemes which come along with credit cards of various banks.
As visible in the graphs, we are witnessing an unfathomable growth in online commercial sales with the target audience of the E-commerce industry doubling in under 7 years.
ADVANTAGES :
Now that we have talked about how EMIs have impacted businesses, we move on to analyze the impact of these schemes on the consumers and especially the youth. While the scheme has its problems, the benefits that the citizens have derived from this scheme cannot be overlooked.
EMI has played a pivotal role in making expensive things affordable. Washing machines, refrigerators, microwaves, televisions, smartphones, etc all are basic electronic goods that most middle-income families desire to possess and make use of. EMI has enabled these families to acquire these goods and fulfil their daily needs. What seemed impossible to afford or acquire previously, is now within the income level of the common man. EMI also helps in spreading or distributing the cost of a commodity over a long period. Hence, what would be a huge burden or deep cut in the pockets of the consumers if they had to make a lump sum payment has been replaced by ease of burden on consumers’ monthly budgets, thanks to EMIs. EMIs also provide an edge to consumers as they can forecast in advance the payments that they will have to make using EMI calculators or various tools available online. Since the burden of payments can be forecasted in advance, consumers are already aware of the risk they are taking on and this gives a sense of security to the buyers. One final benefit of the EMI scheme is flexible repayment options, i.e. several banks and financial institutions now offer flexible EMI schemes. Here, the lender allows you to decide on the amount per EMI or the payment duration, depending on your financial standing and income. Further, EMI schemes have been instrumental in removing mediators involved in credit financing. Several banks and financial institutions now offer flexible EMI schemes. The EMI is directly paid to the lender, and there is no involvement of multiple parties handling your payments. Now let us discuss the impact of EMI schemes on the common man. First and foremost, EMI puts a long-term burden on the consumers. Even though EMIs have facilitated the expansion of consumerism and has been one of the driving forces in managing to put a smartphone in every hand, EMIs are responsible for drowning these very hands in long-term debt. When the users take on an EMI scheme they are locked in to pay a monthly sum till they clear off the dues, so people are stuck in this payment cycle. If a consumer fails to repay a monthly instalment it not only adds to the interest but also affects the credit score of the customer. The credit score of a person is extremely important since only after looking at the credit score do banks offer loans to people, so since EMIs can negatively impact credit score upon non-repayment, one should practice caution while opting for them. If the consumers wish to get out of the payment cycle earlier i.e. before the stipulated time of the scheme, they have to pay an additional prepayment charge which adds to the cost of the EMI. EMIs also lead to a reduction in the financial flexibility of consumers. This is because a fixed part of the consumer’s budget is devoted to paying the EMI instalment, the consumers face boundaries in deciding where to spend. In essence, many times the EMI which was meant to benefit the consumer ends up curtailing the financial freedom of the consumers.
NO COST EMI
A no-cost EMI is a slightly different form of an EMI wherein the consumer does not need to pay any interest on the loan secured in the form of an EMI. While on the face of it, the scheme is very alluring and plausible, the logic and mathematics behind the scheme tell a different story. In most cases, interest is indirectly included in the no-cost EMI by charging a higher rate. Since the cost is hidden in the price of goods, customers end up paying interest in a different form which leads to inflation of prices of goods. Retailers use a couple of tricks or methods to offer No-cost EMI to consumers. In the first one, the retailer excludes any discount component from the price offered to the EMI seeker. For example, if a product is offered at a discounted rate to everyone, then consumers availing of the no-cost EMI are not eligible to receive the discount. The second and more frequently used method is adding the interest rate in the price itself which leads to a markup in the prices. The Reserve Bank of India (RBI) issued notifications that called out the farce of a no-cost EMI scheme. The 2013 circular clarified that EMIs with zero percent interest are non-existent in actuality. Even so, no-cost EMI schemes are quite popular among users because we sometimes forget that there is no such thing as a free lunch.
DISADVANTAGES
The youth of today is the generation that is most gullible and prone to changes in consumption behavior due to outside influences. Lacking experience in handling finance, the idea of EMIs seems very appealing. These EMI schemes cater to the instant gratification temptation; Young individuals are lured with promises of immediate happiness through products and experiences. Social media intensifies this desire for instant gratification, diverting young people from saving for the future. The fear of missing out is very prudent amongst the GenZ and this fear paves a path for unplanned or irrational purchases. Social media fosters Fear of Missing Out (FOMO), compelling individuals to keep up with their peers’ lifestyles, driving young people to overspend on items or activities they can’t afford, and depleting their savings. EMIs play a crucial role in encouraging excessive spending. These installment-based payment plans make high-cost purchases seem affordable by spreading payments over time. The affordability illusion has also played a vital role in increasing the popularity of this scheme amongst the youth. EMIs create an illusion of affordability, with consumers focusing on monthly payments rather than the total cost. This perspective can lead to multiple EMIs and each instalment may sound small but if all finance costs are added up throughout the financing, it could be a large payout.
This chart is testimony to rising purchases through social media and the power of social media in influencing the choices of customers and a large portion of these purchases can be credited to EMI schemes.
As witnessed in the two graphs, the increase in average salaries has been declining for a decade while on the other hand, the loans and interests on them have been on the rise. Consumer debt has increased in recent years but earnings haven’t caught up to this level of servicing the debt. This has raised some questions :
Is this leading to a bubble? Is EMI acting like a poison for consumer savings?
The fall in savings leads to depleting deposits in the banks, hurting the credit creation process on one end while increasing the debt burden on the consumers and raising revenues of firms on the other end. The world has seen a rise in interest rates in the last three years and there has been a boost in post covid credit growth.
CONCLUSION
EMI is thus, a double-edged sword –
Post EMI cash flows, if managed properly, can give a good balance to finance vs purchasing power. Any mismanagement will result in an individual getting trapped into debt, failing the whole purpose of the EMI scheme:i.e., to make things affordable and raising the purchasing power of consumers. While on the one hand EMIs have led to an increase in e-commerce and given the common man the power to afford, on the other hand, it has curtailed financial freedom and posed a debt burden. If one were to comment on the impact of this scheme, it could be analyzed through two lenses- One focusing on giving purchasing power to the common man and boosting the economy and the other highlighting the rising debt burden. The pros and cons of EMIs make it a necessary evil for society. To take a stand about the viability of EMIs would be unfair.
By:-Shubham Kothari
RESOURCES USED:
- Vaidhyanathan, J. (2023, June 14). What is No-Cost EMI and how does it work? Forbes Advisor INDIA. https://www.forbes.com/advisor/in/personal-loan/what-is-no-cost-emi/
- Mint. (2021, September 24). Everything you need to know about no-cost EMIs | Mint. Mint. https://www.livemint.com/money/personal-finance/everything-you-need-to-know-about-no-cost-emis-11632462586418.html
- Motiani, P. (2022, October 12). What is the actual cost of “No-cost EMI” you pay? The Economic Times. https://economictimes.indiatimes.com/wealth/borrow/what-is-the-actual-cost-of-no-cost-emi-you-pay/articleshow/66213515.cms
- Kagan, J. (2021, April 24). Equated Monthly Instalment (EMI): How it works, formula, examples. Investopedia. https://www.investopedia.com/terms/e/equated_monthly_installment.asp
- TheBuyT. (2022, April 10). Is it worth buying things on EMI – Advantages and disadvantages of EMI. https://www.thebuyt.com/is-it-worth-buying-things-on-emi-advantages-and-disadvantages-of-emi/#:~:text=The%20Disadvantages%20Of%20EMI&text=Long%20Debts%20%E2%80%93%20You%20remain%20in,Missing%20EMI%20causes%20negative%20implications