Should You Buy an Expensive Smartphone on EMIs this Diwali?

October 30, 2021 Mutual Fund

India is one of the largest smartphone markets in the world. The main reasons for the ever-growing demand for smartphones are the increase in disposable income and higher purchasing power; the availability of low-cost internet packages; and the basic human need to always stay connected with loved ones near and far, especially in our post-pandemic world.

So this Diwali if buying a high-end smartphone is at the top of your wish-list but beyond your budget, several banks and other financial institutions are ready with exciting loan offers, such as credit card EMIs, consumer durable loans, personal loans, and Buy Now Pay Later (BNPL) schemes, etc. But is it a smart thing to avail of these offers?

In fact, smartphone prices have considerably increased right before Diwali due to the following reasons:

• Most smartphone brands are facing supply-crunch in India due to robust sales during the Ganesh Chaturthi and Navaratri festivals.

• The shortage of rare earth metals used in the manufacturing of hi-tech components across the global mobile industry. That has led to some components, including memory chipsets, and charging adapters becoming very expensive, hence, raising the prices.

• Although the 5G technology is not available in India yet, most smartphone brands are introducing their new models equipped with it.

In spite of the fact that smartphones can be really expensive and unaffordable, people still buy them and fall into a financial burden. Most e-commerce websites, such as Amazon, Flipkart, etc. as well as brick and mortar stores, such as Croma, Vijay Sales, among others are offering high-end smartphones on easy EMIs through credit cards and “Buy Now Pay Later” schemes. Moreover, you can also avail of a Consumer Durable Loan or Personal Loan to buy household items, including smartphones. Such EMIs offers through credit cards and loans are aggressively promoted during Diwali to lure customers.

Here are a few benefits of buying an expensive smartphone on EMIs this Diwali:

• Special deals:

  Many online and offline merchants are offering massive discounts on smartphones if you opt for the EMIs option. For example, Amazon (India) recently had an offer of up to Rs 5000 instant cash back on certain home appliances on purchases made through HDFC Bank Credit Card EMIs.

• No-Cost-EMIs:

  Due to the high competition during the festive seasons, many resellers are offering No-Cost-EMIs. With this offer, the interest amount is refunded to you in the form of cashbacks. The second offer is Low-Cost-EMIs where a very small amount of interest is charged on your purchase. There are other offers like discounts on the processing fees, etc. So, Diwali is the best time to take advantage of such offers where you do not have to pay a huge amount as interest for availing of a loan.

• No need to wait:

  With the convenience of lower EMIs, you get to own that smartphone you have been eyeing for a long time right away. So, you get the product when you wanted without having to wait until you save enough money for it.

As every coin has two sides, buying an expensive smartphone on EMIs this Diwali has its cons too:

• High rate of interest:

  If you opt for EMIs through a credit card or consumer durable/personal loan, you will have to pay a huge amount on the interest. The rate of interest typically ranges between 13% p.a. to 28% p.a. depending on the type of borrowing and lender. Even if you opt for No-Cost EMIs or Low-Cost-EMIs, the bank or NBFC will charge some extra amount one way or the other such as, high processing fee, no cash discounts, no promotional gifts, etc., which you would have otherwise benefited from.

• Higher cost:

  Although the cost of your purchase is mainly determined by the rate of interest the lender charges you, there are other factors as well that contribute to determining the cost of your loan. When you avail of the EMIs option, you will be charged a considerable amount as processing fees. Moreover, the sellers show you the smaller amount of monthly EMIs you will have to pay, which makes the smartphone and loan look quite affordable. However, you end up paying much more than what you would have paid with a regular cash payment for the smartphone.

• Monthly burden:

  If you frequently opt for EMIs on your purchases, it will create a monthly financial burden on you. This will be an extra fixed monthly expense that you cannot avoid until it is all paid off. That can become very stressful if you are on a tight budget.

• Depreciation:

  While buying anything on a loan, it is important to calculate the expected life of the product. Consumer durable items, especially smartphones, depreciate rapidly over time. It does not make sense if your product loses its value before the loan repayment. Furthermore, most brands launch new models periodically, which make the previous models obsolete, and ultimately their prices drop.

• Higher credit utilisation ratio:

  When you avail of a consumer durable loan or EMIs facility on your credit card, your credit utilisation ratio increases. It is advisable to maintain the credit utilisation ratio below 40% of your eligible credit limit. For example, if your total eligible loan amount is Rs 5,00,000, you should not take total loans of more than Rs 2,00,000, as it will increase your credit utilisation ratio and affect your credit score.

• Damage credit score:

  If you do not pay your dues on time, have a high credit utilisation ratio, check your credit score multiple times in a short duration, frequently apply for loans and credit cards, then it can negatively impact your credit score.

• Increased prices:

  As stated earlier, the prices of smartphones have increased considerably due to supply crunch and increased cost of components. If you want to buy your dream smartphone at the best possible price, then it is definitely not the right time to buy, whether on EMIs or cash payment.

To Conclude:

Buying a smartphone on EMIs this Diwali is not advisable as you will end up paying a very high amount over the loan tenure. Although the monthly amount of EMIs makes it look affordable, it actually costs a lot more than the actual price of the device. However, if you are ready to pay the extra amount and need to buy the smartphone during the Diwali sale, make sure you check multiple online and offline resellers. Compare the deals they are offering and choose the one that has the best value for money. Moreover, remember to pay your EMIs timely since not doing so can negatively impact your credit score.

Happy Diwali!

This article first appeared on PersonalFN here