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Disadvantages of EMIs you should know
Every financial product in the market exists because of one reason only. To make money for the owners by providing convenience to its customers. But every service has some cost attached to it. Many are straightforward, helping you to make quick decisions, but many have quite a significant hidden cost that many people sometimes do not factor in.
In this article, we will talk about one such product known as Equated Monthly Installments or EMI, and take about the hidden cost and disadvantages of EMIs.
What Is an EMI?
EMI facility, also known as equated monthly installment, is a payment option that allows you to divide the cost into smaller, more manageable parts. You usually use it for high-value purchases such as electronics, appliances, and cars. The EMI facility has become increasingly popular in recent years as it enables individuals to make purchases that would otherwise be unaffordable.
One of the benefits of the EMI facility is that it allows individuals to make purchases without having to pay a large sum of money upfront. Instead, they can divide the cost into smaller installments, making it easier to manage their finances. Additionally, the EMI facility often comes with a low-interest rate, making it a more affordable option than other forms of credit.
Another advantage of the EMI facility is that it offers flexibility to the buyer. They can choose the duration of the EMI and the frequency of payments, which can be monthly, quarterly, or even yearly. EMI allows them to tailor the payment plan to their financial situation and budget.
The Hidden Cost
The above-said features are what the banks want to sell. They do not emphasize how it can affect you in other parts of your life or could easily hamper your finances.
When you purchase things on EMI, it causes you to have a false sense of ownership, as if you have already paid for it. Whereas in reality, you have to pay for it over long periods. It lets you believe in the false sense of a rising standard of living and falls prey to the assumption that you can afford all this stuff.
When you get this false sense of affordability and fake sense of ownership, you buy things that complement your existing range of products.
And online shopping sites are very much a culprit in this situation.
They offer attractive deals to entice you more and more and prey on your impulsive buying.
Do you remember any incident where you went on to buy one thing but somehow ended up with more than that?
You must have felt I am purchasing this for my use, but I might need this other XYZ product for better outcomes. Thus, the habit of impulse purchasing develops. And when you buy all this additional stuff on EMI, the disadvantages of EMIs comes to fruition the results get compounded, and you become a victim of lifestyle servitude.
The SnowBall Effect
What happens when you become prey to such a service? What is the actual disadvantages of EMIs? Your different EMIs get added up for next month’s payment, and the first thing it does is limit your savings.
You have to pay for the EMIs at any cost; if you miss even a single payment, the charges are so huge that it affects your pocket more.
Banks want you to miss your payments. It is where the maximum revenue for the bank lies.
An article published in 2022 reported that American Banks made around $12 Billion in late fees in 2020.
It is the same reason banks give you so much credit so easily. They want you to do expensive shopping and get late on your payments.
So not making the payment is a strict no.
And when you do, you are with less money for the month. Which means you would probably save a little less.
Over the period, this discourages your money-saving habit. You would often think that the remaining fund is insufficient to survive. How can you think of saving?
And you are smart enough to realize that you need to save and invest money for a better future for yourself and your family.
The less you save and invest, the more impact it causes on your future financial goals and the more difficult for you to reach your objectives in time.
The cost of time is too much to gamble with. The money you could’ve earned by investing rather than spending is too much to fathom. The compound interest works in your favor if you know how to use it effectively.
If you don’t and instead spend your salary on paying back the loan, it would be difficult for you to live according to your wish.
You would have to work more hours to pay the extra interest, which can be significant if you ask me.
Let’s say you want to buy a car for Rs 8 Lac and in this range, you get the basic models of the cars with not so much extra facilities.
Let’s assume that your after-tax salary is Rs 1 lac.
Now if you buy the car on EMI at an 8.5% interest rate, your monthly EMI comes to around 16.4K; not so bad for a person having 1 lac each month.
But for this facility, you pay 1.84 lacs as extra interest over 5- years.
That is around two months of your salary. 2 months of your time is spent working for the bank and not for yourself.
During that time, if you buy more things on EMIs, you’d have to work more hours and months to pay off the interest.
Why would you opt to do that? Do you work for anyone else for free? When you don’t spend your time wasting for others, why are you spending, no, wasting your time for the banks?
The Solution:
The best way to stop yourself from falling into the EMI trap is by simply saving money before buying the product.
Whenever you have such big spending on your list, you generally have some time before you go and buy out the product. You have to research the item and check out its competitors. Look for the pricing. Many things go on before making any big purchase.
What you can do, is create a separate fund or account for this purpose only. Add money each month and let it be idle until you reach the target.
There are many options at your disposal to create your separate account. Many companies provide you with this service at your fingertip.
Yes, it will take you much longer to get any new item, but you will receive a much better value for your money. Not to mention, your savings can restart, and you can safely achieve your investing goals.
