Interest free EMIs!!! Don’t be fooled.

Interest free EMI is a major trap in the retail industry today. While it is dominant in Electronics and gadgets, Tractors, Automobiles and Equipments are also not very far. People working in loan segments in NBFCs and Banks will know pretty well about it. The question is why on earth will anyone lend you money without earning any interest, unless of course he/she is personally related to you. And that too when they themselves are getting the money on loan at a certain interest. Imagine yourself taking a personal loan at x% annual interest, to lend it out to another person at y% annual interest. Is there any reason why x>y? I believe no.

The question then is, how is it that many merchants are providing interest free EMIs? I’m just trying to answer the question in this article. The trick lies in Internal Rate of Return (IRR), which is a tool to measure profitability of an investment. It’s internal because it does not consider external factors (interests and inflation). It is related to Net Present Value (NPV). IRR is the interest rate in a given time frame which results in a zero NPV. In case of loans it is the actual rate of interest. Now, the detail funda and calculation is not meant for morons like me. For us there is MS Excel and it’s inbuilt functions of which IRR is of our basic interest at the moment. The function helps us calculate the IRR, for a given cashflow. I’m attaching a ready to use calculation sheet for your reference.

IRR Sheet

In the sheet provided, first let me try to explain some of the terms.

Asset Cost: Is the price at which you are purchasing the gadget, say a laptop.

Net Finance: It is the actual loan amount. If you are purchasing a Laptop of 50000 in 6 (Interest Free) EMIs, then the actual loan becomes 41667. Because 50000/6= 8333.33. which is the EMI. and the First one you are already paying at the time of purchase. So, it (1st EMI, in this case) shouldn’t be considered as loan.

PPD: Prompt pay discount, which you usually do not get. It gives you certain discount in percentage if paid within certain no. of days.

Tenure: is the tenure of loan repayment.

No. of Installments: No. of actual EMIs. For a tenure of 6 months, no. of installments will be 5, because u pay one EMI (equivalent of money as down payment during purchase.)

Installments in Advance: In case you are providing EMI in advance. Quite popular in Car segment.

Moratorium: It is the time between loan disbursement and the 1st EMI due date. It is usually 30 day i.e. One month.

Management Fee: Or processing charges etc. which has an impact on IRR and most of the times we ignore it and the financer goes away with lucrative IRR and we remain happy thinking that we are paying lower interests.

Loading: 6 EMIs of equal value means Equally loaded or none as per the sheet. But, if financer is taking 60 % of your money in first 2 EMIs and rest 40% in 4 EMIs, it increases the IRR by a huge percentage. This is simply the time value of money 🙂 Isn’t it?

Split Disbursement: It is usually for house loans or mega projects where the loan is disbursed in stages as per the development of the project.

Upfront Discount: Also known as subvention, this is the major area which heavily influences the IRR.

Credit Period: The time between the invoice date and the actual payment date of the loan amount to retailer or seller. More credit days, more the IRR. But the seller also doesn’t like credit days as he loses money due to credit.

Sourcing: It comes when the financer gives the lead to the seller.

Now, let me give you an example. See the image below.

The flat rate of Interest is Zero. But the IRR is about 2%. Now see the next screenshot.

Notice that the Flat rate is again Zero. But IRR is more than 14 %. How? Just because of the upfront discount or subvention. This is the money, the seller gives to financer to give you a rosy picture of interest free EMIs!

You can download the sheet and experiment by changing various parameters. Revert back in case you need help. Till then, bye!

© Asitav

I'm a business analyst. I have a background in Sales, Engineering, MBA and analytics. I enjoy photography.


  1. Soma
    July 31, 2011

    Good One 🙂

  2. girish
    September 5, 2011

    But if the seller is paying the financer? Do a normal customer on the retail site need to worry about that?

    1. Asitav Sen
      September 5, 2011

      Yes. Because, you could have got discount of that value. 🙂

  3. Siva
    August 23, 2012

    Hi Asitav Sen,

    It is nice reading your article on EMI and its hidden plays..!!

    Please let me know the following particulars which I could not understand..

    1. What is Flat Rate why it is empty(screen shot) and its importance to the consumer on purchase?

    2. The first IRR is 2% i nthe screen shot and it become 14% in the second…How?

    3. What is upfront discount? what its importance to consumer point of view?

    I seek your kind advice so it will help me in taking decision in moving to EMI or not..!!



    1. Asitav Sen
      August 23, 2012

      Dear Siva,

      Thanks!!! I’ll try to clear up the doubts.

      1. Flat rate is empty because it’s zero. Ultimately, Usually while taking a loan, we consider this rate of interest as the criteria.
      2. In second image, it became 14 % by addition of upfront discount.
      3. Upfront discount/subvention is the amount the the financer receives (or pays less from disbursement), apart from the EMIs. The seller pays this amount to the financer from his margin.

      It’ll be beneficial for you to go for EMI if and only if you can bargain enough to take the upfront discount/subvention in invoice price. Means, you take the discount instead of the financer.

      TThis article may be helpful for you.

  4. mayank abhishek
    April 11, 2017

    please define the other terms in the IRR sheet.

    1. Asitav Sen
      April 11, 2017

      Hi Mayank,
      All the terms are defined in the article. If you have any specific questions, you can email me.


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