Buy Now, Pay Later: The EMI Route to Ownership

‘If you think nobody cares if you’re alive, try missing a couple of car payments.’

This Earl Wilson quote from yesteryear makes us chuckle, but is so relevant in the present context. We are being constantly bombarded by various ways and means to enjoy life to the fullest. This has left us permanently wondering how we can manage to afford all the appliances, services or assets that we wish to own.

The one solution to all your problems? Buy Now, Pay Later.

Money is your modern-day genie. It is quite literally the currency that can fulfil your pleasures and needs like travel, vacation, surgery, home, home renovation, business needs and even just daily groceries. When you do not wish to defer the ownership of product or service, but find it hard to pay that up front, you go down the debt route.

Buy Now, Pay Later: Breaking It Down

Going further, let’s focus on the ‘pay later’ bit. Generally, this part of the promise is made by you to the company enabling you to ‘Buy Now’. You usually honour this agreement by paying in parts for a fixed period of time. However, do you understand how this sum is calculated? What proportion of it is being paid towards the principal? How much interest do you actually end up paying? Would it be beneficial for you if you end up paying a part of it earlier?

Let us try to understand the concept of EMI and the amortization chart. If you know basic excel, you would be able to perform a short DIY session to see if you have understood the concept.

Let us take a simple example to understand this.

1. Kevin, the minion has taken a loan of  ₹1,00,000 (P) from Mr Gru.
2. He has agreed to pay back the loan in 12 (N) Equated Monthly Instalments.
3. The rate of interest that has been agreed on is 12% per annum ®.

Open up Excel to calculate the EMIs for this transaction. Use the formula PMT.

The following variables are used to calculate the EMI

Mandatory: Rate (R), Nper (N), PV (P)

Optional: [fv], [type]

A few things to be cognizant about while using this formula:

• The rate in this example is on a per annum basis. Remember to divide it by 12 (# of months in a year) to convert it to a monthly rate of interest.
• The result of the PMT formula would be negative and generally marked in Red since it indicates negative Cash Flow.
• The optional variables can be used when Gru decides to steal the Planet Mars.

Kevin is now aware that he must pay ₹8,884.88 (EMI) for the next 12 months to Mr. Gru.

EMI * 12 = ₹8,884.88 * 12 = ₹1,06,618.55

Kevin does some quick math and realizes that he borrowed a lakh rupees and is paying ₹6,618.55 as total interest. Why is he not paying 12% of Rs. 1 Lakh, which is definitely ₹12,000? Is Gru being nice to him for the services he provides in the evil factory?

Stuart notices his good friend in turmoil and explains to him the concept of the Loan Amortization Chart:

He explains the following concepts;

• EMIs over the period of the tenure of the loan remains constant.
• The principal portion of the EMI increases over the period of the loan.
• The interest portion of the EMI decreases over the period of the loan.
• Interest on Reducing Balance: Paying Interest on the Principal portion outstanding after each EMI paid.

This explanation brings a halo of understanding over Kevin’s head. The concept of EMIs isn’t hard to grasp, but it is always better to understand the deal before you say, buy a mobile phone on easy EMIs from Bajaj Markets. With this hassle-free financing option, you can choose Bajaj Markets for anything, from mobile phone loans to home theatre system loans across a network of more than 43,000 merchants across India.