Are Zero Percent Interest Schemes Really What They Say They Are?

A zero percent scheme may seem tempting, but are they really “zero percent” in reality? Let’s find out, shall we?

Zero percent 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 instalments which you strongly believe are interest-free. But unfortunately, you end up paying more than what you actually think you are!

There is a popular saying, “There is no such thing as a free lunch!” and Ramesh now fully endorses it. But not too long ago, he completely disagreed on this, thanks to the zero percent finance schemes offered by some NBFCs (non-banking finance companies), through which he had bought a couple of consumer durables for his home.

Additional Reading: Credit Card Or Consumer Loan? How To Borrow Smartly For Festive Shopping

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. Thanks to the regulations of the Reserve Bank of India (RBI), many banks have now stopped offering such schemes for financing consumer durables.

However, there are several NBFCs who still 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 isn’t affordable. These schemes brag about “no interest” or “zero” interest should you take a loan to buy any consumer product, say TV, washing machine, etc. As per these schemes, a customer will only pay back the amount of the said goods and nothing additional.

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, lets say you buy an LCD colour television that costs around Rs. 48,000 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.

Additional Reading: What Is EMI And How Is It Computed?

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 scheme is actually in fact zero percent itself!

Are there any zero percent schemes at all?

Well, there are schemes that could fall in the category of being  zero percent but these are available in a different form. There are some Credit Cards where if you spend more than Rs. 5,000 with it, it might allow you to pay the amount in three EMIs without any interest. However, this would still come with a processing fee of 3-5%.  Unfortunately, this is the closest you could get to a true zero per cent scheme.

Additional Reading: Credit Card Purchases Converted Into EMI: Yay Or Nay?

So, in reality, none of these schemes are what they say they are. Therefore, it’s important to ask the right questions before falling into such trap. Understand fully before you commit to such schemes and ensure that you aren’t being taken for a ride.

Zero percent or not, there are far better options for you if you’re looking to buy something big this festive season. We have numerous Credit Cards that have way better offers on them that are irresistible. Why don’t you try them out?