We now know that installment credit is almost as old as the civilization itself. We have also seen the equated monthly installments (EMIs) revolution and how it powered the first wave of consumerism in India (backlink). But, why does this age-old concept enjoy such popularity that is only growing? Well, there are several reasons.
Let us explain to you with an example. Karthik is a 30-year-old private sector employee, who earns a net salary of Rs 10 lakh a year with annual savings to the tune of Rs 1.5 lakh. He wanted to purchase a car for his family of four. However, the car is priced at Rs 7.5 lakh – 75% of Karthik’s annual income. If he were to save up for the car (without considering macro factors like inflation and assuming his income and the car price remains the same), it would take five years for him to make the purchase. But Karthik, without dipping into his savings, smartly chose to take a loan of Rs 5 lakh and repay it over five years at an 8% interest rate. He not only was able to purchase the car for his family but also could defer the large payment into manageable payments and pay just a little over Rs 10,000 as the equated monthly installment (EMI). Instead of waiting for five years, Karthik owned a car without burdening his finances by paying small EMIs in the same five years (of course, at a nominal interest).
So, what did EMIs do here? Helped Karthik get what he wanted without having to wait for years to accumulate savings. Eased the financial burden by breaking down the costs into bite-sized repayments. Enabled him and his family to upgrade conveniently. Facilitated easy cash flow without hurting the family’s economic status. Smoothened the financial planning and payments. And finally empowered the family with financial independence.
There are different types of loans that are commonly known – personal loans, home loans, automobile loans, business loans, and other category loans. Credit cards are also credit instruments in another form. All of these offer credit at an interest rate (barring exceptions if any) and facilitate EMI payments.
But if you think EMIs make sense only in the case of high-value purchases or high-value assets, it means you haven’t experienced the convenience and ease of splitting your costs. Sure, there is an interest component involved, but if you choose digital lending agencies you can cut down interest payments by a huge margin.
Let us back it up with some data. The Annual Percentage Rate (APR) is the annualized cost in percentage terms that you pay to borrow credit including all the associated charges and fees if any. It is a broader measure of the cost of borrowing. According to available data, the average APR of credit cards is between 42% to 50%, making the credit instrument one of the most expensive options for long-term use. Loans have a slightly lower APR of 8% to 24% on average, depending on the type of loan and the creditworthiness of the applicant. Digital loan providers, on the other hand, have further brought the APR down with innovative business models and owing to lesser operational costs because of the very virtue of digital business. In fact, there are some providers whose APR is an average of sub-10% when calculated over a period of four-five years.
While incumbent financial institutions have done (and continue to do) their bit in financial and credit inclusion in a credit-starved, skewed and heterogeneous market like India, there is much left to be desired. This is when digital EMI providers or checkout finance platforms have sort of revolutionized credit accessibility and affordability, which eventually led to the smoothing of payments.
It wasn’t long ago that you had to get in touch with your bank, and maybe even pay the branch a visit, if you had to get a consumer loan. But changed since the mid-2010s, thanks to the forward-looking banking initiatives by the policymakers. But, the gradual emergence of point of sale (PoS) systems had given an impetus to the usage of digital transactions – especially by debit and credit cards.
Though PoS penetration was quite slow in India, it changed the way businesses are done. It gave a new pathway for scaling credit services. And with the advent of tech that is ably aided by the governmental initiatives for the digital economy (UPI, QR Code, eKYC, etc), credit at PoS – or checkout finance as we call it today – saw exponential growth.
The reasons for this are many, once again. But the two major drivers are: (i) It made credit access easy – right at the disposal of customers and (ii) merchants saw the EMIs fuelled consumerism especially as they catered to the needs of aspirational Indians. Of course, props to the regulator and the policy makers for creating an environment for digital initiatives to take off on a strong footing.
This has had ripple effects on the entire ecosystem. With the growing commerce and private banks and new-age fintech players eating into their share of the pie, the incumbent financial institutions, which had rigid policies and mechanisms that often excluded a large number of credit-seeking customers, started to cater to wider sections. The legacy institutions also had to come up with flexible plans as competitors, especially fintech players were growing rapidly with low-cost credit over long tenures and also 0%* interest in some cases. This ultimately changed the market dynamics, benefitting the customers.
Now, customers not only have the choice and convenience to take credit at the point of sale and pay in easy EMIs but they also have low-cost plans available (even at 0% interest rates offered by some players). Additionally, they also have the choice to also go for EMI after the purchase (post-purchase EMI conversion).
All said and done, access to credit acts as a force multiplier if used responsibly and optimally. Ease EMIs an excellent financing option for meeting needs and aspirations irrespective of your financial status, giving you an opportunity to realize your dreams and reduce financial vulnerability. They are a smart choice as they help you ease the burden, smoothing your financial payments. That said, choose wisely while going for EMIs as different providers have different terms and conditions. Pick the one that suits you best.
Note: ZestMoney offers easy EMI options over tenures of 3,6,9,12 and up to 24 months. It is low-cost and completely transparent. If you are looking for a credible and trusted digital EMI platform, click here to check out our offerings.