Zero per cent schemes: How consumers get fooled ?

Ashish M



As a child when my first milk tooth fell, I was
told to keep the tooth under my pillow at night.
When I woke up the next morning, I was delighted
to discover a one rupee coin instead of my tooth
under the pillow. When I asked my parents about it,
they told me that a tooth fairy had switched my tooth
for a rupee coin during the night.

As a child the story had lots of appeal for me.
Of course as I grew older I realised that there was
no 'tooth fairy' and my parents placed that one rupee coin.

The stories surrounding zero per cent finance schemes
are perhaps of the same genre. The old adage that
'there is no such thing as free lunch' aptly describes
the zero-percent-interest schemes.

These schemes were widely popular till a few years back.
RBI regulations advising banks to refrain from offering
such schemes as well as the general withdrawal of major
banks from consumer durables financing has meant that
such schemes have not been in vogue for the last 2 to 3 years.

However there are several NBFCs (Non-banking financial
companies) that continue to finance consumer durables purchase
and also have zero per cent schemes. The main attraction of
such schemes is that they influence you to purchase consumer
goods that could be more expensive than your wallet size.

The lure of zero percent interest is an added attraction that
makes you feel that 'YES' I am getting something free and
thus I am able to buy a 'bigger and better' product.

But that is just a smart way in which such schemes fool you. Here's how................................



Unlike their names, most zero percent schemes have

other costs in built. The biggest cost is that you
forfeit the cash discount that you would have got
otherwise from the retailer. Also you will be paying
some processing/transaction fees and/or advance EMIs
(equated monthly instalments).

So let us see how the costs stack up in a so called
zero percent scheme.

Example: An LCD colour television costs Rs 48,000
and is available on zero percent EMI scheme for
six months (thats is, there is a EMI of Rs 8,000
per month for six months). The consumer needs to
pay a processing fee of Rs 1,000. If the customer
had bought the same TV by making a full payment s/he
could have availed of a cash discount of Rs 2,000 which
s/he is not getting if s/he opts for the zero percent
scheme.

So it works out like this:

Cost of television set: Rs 48,000

Amount paid/Cost incurred in advance:

Processing fees: Rs 1,000
Cash discount foregone: Rs 2,000
Total: Rs 3,000
Net finance received: Rs 45,000

Payment made by six instalments of Rs 8,000 each
(aggregating in all to Rs 48,000 against finance
received of Rs 45,000).

The effective interest cost works out to 23 per cent per annum......................




However the popularity of such schemes with consumers
particularly in festive season cannot be denied. Market
sources say that despite being costlier in some ways,
consumers prefer to go for these staggered payment schemes
and have been highly successful in pushing sales and
expanding the market for the durables. This is primarily
because of the fact that purchasing through credit
cards is very expensive as compared to purchasing
through these schemes.

Also, the success of these schemes can be attributed
to the availability of credit at the point of purchase,
minimal paper work, small ticket size and hence a
not-so-stringent eligibility criteria.

So are there any true zero per cent schemes? Yes there are.

Some of them are available on the much-maligned credit cards.
The credit card that I have allows me to convert specific
spends greater than Rs 5,000 into three-month EMIs without
any cost or fees. This is the closest that hard-nosed bankers
come to offering true zero per cent schemes. Some other major
credit card issuing banks also have similar schemes.

All said and done, the best way to check if a zero per cent
scheme is really
worth it ask the following questions:

Any fees or charges?

If I pay full amount do I get a discount that I am not getting
if I take the zero per cent scheme.

If answer to both the question is no then you have a true
zero per cent scheme! So you can now zero in on your zero
per cent schemes and spare yourself from being fooled.