Why buying smartphone on EMIs is not a wise idea

Thursday, May 30, 2013 |

For a country like India where average salaries are low compared to other developed/developing economies, we tend to spend too much on buying the latest electronic gadgets. This trend of splurging on electronic gadgets is observed more in the new generation because of lifestyle reasons.

Considering that the average life of a smartphone is about one year, we have to ask the question whether buying a smart phone on EMI is really a wise decision. As it is we as a society are very profligate with our money and now the mobile phone companies want us to spend more on buying their expensive and much-hyped devices. Should we take the bait and buy these devices on EMIs? The prudent answer is a vehement "no"!

Though it is a lifestyle choice and up to individuals to choose the type of phone they want to use, this decision has a significant impact on the personal finance of an individual. Every personal financial decision, no matter how big or small, has an impact on the overall finances of the individual. With the current trend of zero per cent interest rate on EMIs (with hidden processing fee) and no down payment, the smartphone business is booming for mobile phone manufacturers, banks and telecom operators (higher ARPU). On the face of it, the EMI option appears attractive to individuals who cannot afford a high-end phone but would like to own one. At a deeper level, individuals usually fall for such offers because they are looking for instant gratification. This nature of ours makes us susceptible to such offers over the savings route.

Opportunity cost
Let us consider an example where an individual who can afford to buy a smartphone worth Rs. 12,000 gets lured by the zero per cent interest, zero down payment bait of buying a smartphone of Rs. 36,000 on EMIs. This individual ends up paying an excess of Rs. 24,000 beyond his means. However, a prudent individual would choose to buy the smart phone that costs Rs. 12,000 and invest the excess amount of Rs. 24,000 in a systematic plan. Considering that he invests Rs. 2,000 per month for a period of 12 months at a 10 per cent annual rate of return, he would accumulate Rs. 25,281 at the end of the year. The same amount would be worth around Rs. 62,093.37 in 10 years. Not to mention that the same individual over the period of 10 years would change at least five smart phones, getting lured into more expensive upgrades every year.

In the era where marketing mavens drive social frenzy around the mobile phones, it is necessary that we do not succumb to the temptation of spending more than what we can afford. The money thus saved should be prudently invested to achieve more important and essential goals.

ArthaYantra is an integrated online personal finance company.

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