Zero percent schemes, are they genuine?

There is a popular saying: "There is no such thing as a free lunch!" And Ramesh now fully endorses it! But not long before he completely disagreed on this thanks to the zero percent finance schemes offered by some non banking finance companies with which he had bought a couple of consumer durables for his home! He blindly believed that the zero percent finance schemes were in fact zero percent in reality until the time one of his wise friends enlightened him on how these schemes really work! Well, this is what he found out!

What are they?

Till a few years ago there were many such zero percent finance schemes doing the rounds and luring the unaware buyers like Ramesh into it! But thanks to the regulations of the Reserve Bank of India many banks have now stopped from offering such schemes for financing consumer durables. But still there are several NBFCs who continue to offer these so-called zero percent finance schemes!

These schemes do tend to have a big influence if you are someone looking to buy something, which otherwise would be well beyond your reach! You buy their theory of 'zero percent finance' and pay installments which you strongly believe are interest free! But unfortunately you end up paying more than what you actually think you are!

How do these schemes work?

Firstly these zero percent schemes have hidden costs inbuilt in them. Perhaps the biggest loss for you would be forfeiting the cash discount on a product that you could have otherwise got if you had bought it on full cash. This apart you will also be paying a transaction or processing fee under the zero percent scheme and consequently more money through advance EMIs.

For example, you decide to buy an LCD colour television that costs around Rs 48,000. You decide to buy it using the zero percent finance scheme. Under this arrangement you will pay the entire cost in six EMIs of Rs 8,000 for six months. This works out to be Rs 48,000 spread over 6 months. Now here's how you end up paying more! To begin with you pay a processing fee of Rs 1,000. And since you are buying the LCD on a zero percent finance scheme you are not entitled to the cash discount of Rs 2,000!

So here's how it looks in the above example. The LCD costs Rs 48,000! Add up the Rs 1,000 processing fee that you pay initially and Rs 2,000 that was lost out on cash discount. A total of Rs 3, 000! This means you get a net finance of Rs 45,000 only! Now you pay an EMI of Rs 8,000 for 6 months which totals up to Rs 48,000. So at the end of six months you pay Rs 3,000 more for what you got.

Are they genuine?

It is an irrefutable fact that the demand for these schemes is highly felt during the festive season. Market experts believe that there is a marked spurt in sales of consumer durables due to these zero percent schemes. The consumers wouldn't mind opting for these schemes as it is a fact that paying by credit cards is comparatively expensive than purchasing through these schemes. Also, these schemes have minimal paper work, and some friendly eligibility criteria. However, it takes some understanding of the basics to find out if they are genuine or not!

How to decide if the scheme is actually zero percent?

It is always better to ask some basic questions to find out if the zero percent schemes are actually zero percent! Find out if you are eligible for any discount if you pay the full amount and if there are any transaction charges for the finance scheme and if the answer is no for both the questions then you might consider yourself lucky that the zero percent schemes is actually zero percent.

Which types of schemes is actual zero percent?

Fortunately there are schemes that are actually zero percent but these are available in a different form! There are some credit cards where if you spend more than Rs 5000 with it, it might allow you to pay the amount in three EMIs without any cost or fees. Unfortunately this is the closest you could get to a true zero per cent scheme!