Difference between card payment via EMI on shopping site and paying credit card due via EMI

When you make a purchase online using your credit card, you can convert the transaction amount into equated monthly instalments (EMIs). This essentially means that you have converted the transaction (dues) into a loan and have opted to pay it via EMIs over a fixed number of months as chosen.

There are two ways you can convert your credit card payments into EMIs. They are: either through instant EMI conversion on the e-commerce portal itself or convert the transaction amount into EMI after the transaction via Net-banking.
The EMI includes a portion of the principal outstanding and interest component, which you need to pay every month until the full amount is paid.

However, not all transactions can be converted into EMIs. Only those transaction amounts which are eligible for conversion can be converted into EMIs.

Here is a look at how the conversion process works, and whether the interest rate differs when you convert the payment into EMIs on the portal itself or after purchase.

Scenario 1: When you convert the payment via credit card into EMI on e-commerce portal
The credit card EMI offers available at stores and e-commerce portals while buying/paying for the product are popularly known as merchant EMI offers. These are usually offered based on the tie-ups between the merchants/manufacturers and the credit card issuer, which also determines the interest rate at which they are to be offered. Here, the processing fee and interest are normally adjusted against the price offered by the merchant.

Sahil Arora, Director & Group Head, Investments, Paisabazaar.com said, "Once you add the card details on the e-commerce portal, the card issuer may also run a check on your credit profile before approving the merchant EMI option. In such cases, only those meeting the credit profile requirements would be able to purchase goods or services through merchant EMIs."

Once the conversion of transaction into EMI is completed, the monthly credit card limit is reduced by the EMI amount and this amount also gets added to the monthly credit card dues. This process continues every month till the full loan amount is repaid along with interest.

Adhil Shetty, CEO, BankBazaar.com said, "When you convert the transaction into EMI on an e-commerce portal, the interest rates are generally fixed for all customers and credit scores do not play a part in determination of the interest rate. However, having a good credit score and financial history will help you get attractive pre-approved offers which clear your path for purchases through merchants networking with your bank."

Credit card merchant EMI and post-purchase EMI: rates and charges
Source: Paisabazaar.com | Rates as on July 7, 2020
Note: The interest and charges may vary depending on the type of credit card and its terms and condition with the associated merchandise. Also, the interest offered will depend on EMI tenure you have applied for.

Scenario 2: When you buy product and convert the amount into EMI post-transaction
In case of conversion of the payment into EMI after the transaction, card issuers determine the interest rates based on the cardholder's credit profile and their overall risk assessment. In this case, there is no agreement with any merchant/manufacturer to set uniform interest rates for all those buying a product.

When you convert the amount into EMI post-transaction, the bank or the card issuer temporarily blocks/reduces the credit limit by an amount equal to the full transaction amount converted into EMIs. After that, when you start paying your EMIs, the bank gradually increases the credit card limit by an amount equal to the EMI paid.

When you opt for the post-transaction EMI, the one-time processing fee debited from your credit card is separately shown in the credit card bill, which is generally not shown in case of if you had converted the transaction into EMIs on an e-commerce portal. This is because the processing fee gets adjusted via addition to EMIs offered by banks on e-commerce portals.

Also read: Should you pay credit card bill via EMI?

What you should know
Credit card EMIs can be availed either at the time of purchase or by converting the transaction amount into EMIs later. The interest rate, processing fee, foreclosure charges and late payment fee are included in both the processes. However, the rates and fees vary from one bank/card issuer to another. In some offers, especially the merchant ones, processing fees may be waived off.

Differences between convert the payment via credit card into EMI on e-commerce portal vs credit card dues payment via EMI
Arora said, "Credit card EMI offers available at e-commerce portals are merchant EMI offers offered on the basis of tie-ups between merchants/manufacturers and credit card issuers. These tie-ups will determine the tenure and interest rate offered on those EMIs. However, in the case of the credit card dues payment via EMI there is no agreement with any merchant/manufacturer to set uniform interest rates for all those buying a product."

In the case of conversion of credit card payment into EMI on an e-commerce portal, the interest rate, tenure, etc., are pre-set by the merchant, which can be uniform for all. However, in the case of conversion of credit card dues into EMIs, the interest rate, tenure, etc. are exclusively decided by the card issuer on the basis of their risk assessment and credit profile of their cardholders."

The interest rates of merchant EMI offers are usually lower than the interest rate charged on credit card dues payment via EMI. Many merchant EMI tie-ups are also offered in the form of zero-cost EMI where the interest cost is borne by the manufacturer/merchant. The cardholder will have to only bear the GST levied on the interest cost.

Shetty said that if one compares the EMI interest rates offer on e-commerce websites, they are slightly lower or almost similar to the interest rates offered on EMI conversion post-transaction for most of the banks, which, in turn, are comparable to the interest rates of personal loans. "The offers are largely in the 12 - 15 per cent space with the lowest rates reserved for the shortest tenures (normally 3 months) and the highest rates for the longest tenures (normally 24 months)," said Shetty.

"Some merchant EMI offers also come with cash back offers in addition to the zero cost EMI facility, which can in fact reduce the total purchase cost for the cardholder. Thus, availing merchant EMI offers are usually more cost-effective than availing credit card EMI conversion," Arora said.

However, in the case of conversion of credit card dues into EMIs, you may not get the zero cost EMI facility.

When it comes to EMI tenure, the conversion of credit card dues into EMIs post-transaction offers superior choice compared to merchant EMI offers. "The tenure of EMI offers can range anywhere from as low as 3 months to 4 or 5 years depending on the card issuer. However, the tenure of merchant EMIs offers usually goes up to 2 years only," Arora said.