Breaking a Rs 1 lakh purchase into monthly credit card EMIs can make the expense appear easier to handle. Rather than paying the full amount at once, the cost is divided across a series of instalments, allowing a sizeable purchase to be accommodated within a monthly household budget.
The cost of settling a credit card EMI early does not necessarily stop at the unpaid principal. Depending on the card issuer's policy, foreclosure charges, taxes and other applicable fees can be added to the amount due at the time of closure.
A quick check of the issuer's terms before prepayment can help cardholders budget for the full settlement amount.
Suppose you buy an appliance, laptop or another high-value item worth Rs 1 lakh and convert the transaction into a 12-month EMI.
The final cost depends on the interest rate, processing fee and applicable taxes. Your monthly instalment covers part of the principal along with the interest charged by the card issuer.
For illustration, assume the EMI carries an annual interest rate of 15%.
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On a reducing-balance basis, the monthly interest rate would be 1.25%. The EMI on Rs 1 lakh for 12 months would be roughly Rs 9,026.
Over the full tenure, you would pay about Rs 1.08 lakh through the EMIs. The actual amount can be higher once processing fees and taxes are included.
This is why the headline purchase price and the eventual amount paid through EMI are not always the same.
What Changes When You Prepay The EMI?
Foreclosing a credit card EMI involves settling the facility before the agreed repayment period comes to an end. Once the issuer processes the closure, the remaining monthly instalments are cancelled and the interest that would have accrued during the rest of the tenure is no longer payable.
The amount required to do this cannot be worked out simply by deducting the instalments already paid from the original Rs 1 lakh purchase. The outstanding principal forms part of the calculation, with foreclosure fees and applicable taxes potentially added to the final settlement. Some issuers may also apply interest or other charges under their EMI terms.
Consider a Rs 1 lakh purchase placed on a 12-month credit card EMI at 15% annual interest. By the time the sixth EMI has been paid, part of the principal would already have been cleared.
At the point of early repayment, the card issuer would typically look at the unpaid principal and add the charges applicable to foreclosure.
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Suppose a credit card EMI has Rs 51,000 outstanding and the issuer applies a 3% foreclosure charge. The resulting fee would be Rs 1,530. Once 18% GST of approximately Rs 275 is added, the indicative amount needed for settlement comes to around Rs 52,805.
The calculation is for explanatory purposes only. The actual foreclosure liability may be different, depending on the issuer's pricing policy, applicable terms, calculation method and prevailing tax requirements.
The calculation is meant to show the mechanics of an early EMI closure, rather than establish a standard cost. The actual amount can vary between card issuers, as foreclosure fees, conditions and calculation methods differ.
The appeal of prepayment lies in cutting out the interest that would have been charged during the remaining tenure. That saving should be considered alongside the charges that come with closing the EMI early.
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