When to take an EMI?

EMI

EMI is the most trending term in shopping & finances. Yes! The definition has changed to :

“Easy Money Installment” from “Equated monthly installment”.

 

Do you relate to any of the below-

1) I want to buy the latest phone, but it is too expensive

– Don’t worry, the storekeeper has a loan tie up, you can just pay a monthly EMI and get the phone.

 

2) I wish to take a holiday to that country, but the budget is too high.

– That’s not a problem at all, just swipe in your credit card, and convert your buy into an EMI option.

All these are easy options. Aren’t they?

Why did EMI get so much attention?

EMI is just extending loan facility. But, the concept caught attention like wildfire when companies started offering it to consumers to meet their lifestyle and consumption needs whenever affordability was an issue.

 

But do you know the implication of using EMIs for things like gadgets, lifestyle needs?

A phone worth 70,000 will cost 6,300/- each month for a year, which sounds affordable. But you are effectively paying 76,000 for an item which is 10% extra vs the original price. The extra 6,000 you paid, which is actually interest, is financially worthless. This is because after 1 year the resale value your phone would be not more than 35,000-40,000.

Does that mean EMI is not worth using?

No, EMI is one of the most convenient way to build assets like house or land, because they cost multiple times your annual income (so EMI is the only way to afford it). Even more importantly, such assets increase in value over time (unlike a phone which falls in value).

As long as the asset grows in value at a rate higher than the interest rate on you EMI, it’s a good financial decision. This is not the case when we take an EMI for a car or phone, because the value goes down year after year, as technology or fashion upgrades.

But what about the durables I wish to buy, but cannot afford today?

Have you heard the quote –

“A budget tells us what we can’t afford, but it doesn’t keep us from buying it” – William Feather

What are the other options apart from EMI?

  1. If you want to buy something, start planning in advance, set aside a calculated amount each month in liquid mutual funds or RDs & then buy it.
  2. Go for a second hand durable, rather than buying brand new.

Buying electronics, holidays and other lifestyle products on EMI is surrendering to temptation. So, next time before buying on EMI, just rethink whether your buy is helping you increase your net worth (meaning assets!) or is it just to meet your lifestyle need. Pause and think before you buy anything on EMI.

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