The word 'zero' is usually a bait to lure gullible buyers.
During festival seasons, it is common to see advertisements saying a product can be bought for full payment later at a zero interest rate. Most buyers think the loan will not cost them anything.
But a zero per cent interest rate loan is, in most cases, financial jugglery. The word 'zero' is the bait used to lure gullible buyers. In reality, the customer ends up paying an interest rate comparable to that on a consumer durable loan; in some cases, even higher.
In fact, the Reserve Bank of India has often warned banks on 'zero-interest loans' because the concept itself is faulty. In a recent circular, it said such schemes lacked transparency because they distorted the pricing mechanism. "These products do not give a clear picture to customers regarding the applicable interest rates," said the circular.
However, some non-banking financial companies still sell this product through tie-ups with retail chains and consumer durable companies. Such schemes are typically for expensive electronic items like LCD televisions and laptops.
Let's understand this with an example. Say, you wish to purchase a computer costing Rs 30,000. The financial institution offering zero per cent interest rate is most likely to lay down the following conditions. One, there will be an administrative fee of, say Rs 1,000. Also, you will have to pay one or two instalments in advance. If you opt for a six-month loan, the EMI will be Rs 5,000 per month.
So, you can buy that computer by paying just Rs 1,000 + Rs 5,000 (one month's advance EMI) = Rs 6,000. However, before you take the plunge, ask the retailer the cash discount on the product. Most likely, there will be a discount of 10 per cent, or Rs 3,000. So, you pay 31,000 for a product that could be bought for Rs 27,000 -- a good Rs 4,000 more.
For a six-month period, the interest rate works out to a whopping 34.14 per cent. Even if the product was available at a discount of 5 per cent, the rate of interest would be 16.52 per cent, comparable to a personal loan.
"If a person is making cash purchase, he will enquire about the product in various shops and even bargain for a discount. He will most probably tend to forget this when he sees the zero interest rate sign," said Malhar Majumder, principal financial planner, Black and White Financial Managers.
A better option could be to check with your credit card company. During festival seasons, when consumers tend to spend more, the issuers usually come up with offers wherein the cardholder can convert purchases into interest-free EMIs. These schemes are cheaper as they do not have hidden charges and the processing fee is usually lower.
