New Delhi: Converting a large credit card purchase into an EMI can make monthly payments easier to manage, but closing the EMI before its scheduled tenure does not necessarily mean paying only the outstanding principal.
Depending on the card issuer’s terms, customers may have to pay foreclosure charges, Goods and Services Tax (GST) and other applicable fees when they choose to prepay a credit card EMI. At the same time, early closure can eliminate the interest that would otherwise have been charged during the remaining tenure.
For a Rs 1 lakh purchase converted into a 12-month EMI, the overall cost depends on the interest rate, processing fee, taxes and the terms of the card issuer.
Rs 1 lakh purchase on 12-month EMI
Consider an example where a Rs 1 lakh purchase is converted into a 12-month credit card EMI at an annual interest rate of 15%.
On a reducing-balance basis, the monthly interest rate would be 1.25%. Under these assumptions, the monthly EMI works out to approximately Rs 9,026.
Over the full 12-month period, the borrower would pay about Rs 1.08 lakh through the EMIs. The actual cost could be higher after processing fees and applicable taxes are included.
This means the original purchase price of Rs 1 lakh and the final amount paid through the EMI are not necessarily the same.
| Particular | Illustrative amount |
|---|---|
| Purchase value | Rs 1 lakh |
| EMI tenure | 12 months |
| Annual interest rate | 15% |
| Monthly EMI | About Rs 9,026 |
| Total EMI payment | About Rs 1.08 lakh |
The figures are for illustration and actual EMI costs can differ between credit card issuers.
What happens when the EMI is prepaid?
Foreclosing a credit card EMI means settling the outstanding facility before the agreed repayment period ends.
Once the issuer processes the foreclosure, the remaining monthly instalments are cancelled. The interest that would have accrued during the remaining tenure is consequently no longer payable.
However, the settlement amount cannot be calculated simply by subtracting the instalments already paid from the original Rs 1 lakh purchase.
The card issuer generally considers the unpaid principal and then adds any applicable foreclosure charges, taxes or other fees. The exact calculation depends on the issuer’s EMI policy.
Example after six EMIs
Suppose the Rs 1 lakh EMI has an outstanding principal of Rs 51,000 after six instalments.
If the card issuer charges a 3% foreclosure fee, the charge on the outstanding amount would be Rs 1,530.
An 18% GST on that foreclosure fee would add approximately Rs 275.
The indicative settlement amount would therefore be:
| Component | Amount |
|---|---|
| Outstanding principal | Rs 51,000 |
| 3% foreclosure charge | Rs 1,530 |
| 18% GST on foreclosure charge | About Rs 275 |
| Indicative settlement | About Rs 52,805 |
This is an explanatory calculation rather than a standard credit card foreclosure amount. The actual amount payable can vary depending on the card issuer, applicable charges, calculation method and tax requirements.
Prepayment can reduce future interest
The main financial benefit of closing an EMI early is that the borrower avoids interest that would otherwise have accumulated over the remaining tenure.
For example, if a customer has several instalments left, settling the outstanding principal early can eliminate the interest component associated with those future instalments.
However, the interest saving needs to be compared with the foreclosure fee and taxes charged by the card issuer.
Therefore, prepayment does not automatically result in a saving in every situation. The benefit depends on how much interest remains to be paid and how much the issuer charges for early closure.
Foreclosure charges differ between card issuers
Credit card EMI terms are not identical across banks and card issuers.
Some issuers may charge a percentage of the outstanding principal as a foreclosure fee, while other terms and conditions may apply depending on the EMI product and transaction.
Taxes can also increase the final amount payable.
Cardholders should therefore check the applicable EMI terms before requesting foreclosure. The issuer’s customer service or credit card statement can provide information about the outstanding principal, applicable charges and the final settlement amount.
Processing fees also affect the total cost
The interest rate is not the only cost associated with converting a purchase into an EMI.
Processing fees and applicable taxes can increase the overall cost of the transaction. This means that a customer comparing the original purchase price with the total EMI payments should consider all applicable charges.
For the same reason, the amount saved through early repayment should be calculated after considering foreclosure charges and taxes rather than looking only at the remaining interest.
What cardholders should check before prepayment
Before closing a credit card EMI, customers can check:
- Outstanding principal on the EMI.
- Interest that would be payable over the remaining tenure.
- Applicable foreclosure or pre-closure charges.
- GST and other taxes on the charges.
- Any additional fees specified in the card’s EMI terms.
- The final settlement amount quoted by the card issuer.
This calculation can help determine the actual financial impact of closing the EMI early.
EMI prepayment is a cost-benefit calculation
A Rs 1 lakh purchase converted into a 12-month EMI can make a large expense easier to spread across monthly payments, but it also increases the total cost because of interest and potentially other charges.
If the borrower later decides to close the EMI early, future interest can be avoided, but foreclosure charges and taxes may be added to the settlement amount.
The final decision therefore depends on the outstanding principal, remaining interest, foreclosure fee and the customer’s available cash flow.
Credit cardholders should check their issuer’s latest terms and obtain the exact foreclosure amount before making a prepayment request. The Rs 51,000 outstanding example and Rs 52,805 settlement figure are only illustrative and should not be treated as a universal credit card EMI rule.