You might have seen a lot of lending institutions throwing away lucrative advertisements marketing their zero interest loans. But have you ever wondered how does this mechanism actually work? It is the interest along with various other costs that the bank benefits from, so how can the banks slash off the interest rates? Moreover these loans are provided for consumer durables like loans for purchasing washing machine, refrigerators, and cars etc. therefore enticing customers into the installments process of payments. Let us see whether these can actually affect your finances or not?
- The first and the foremost question you need ask yourself is whether or not will the purchase be profitable to you in terms of the time for which the product will be consumed. You need to understand the nature of the product you are trying to purchase. If it is a consumer durable it is obviously meant for consumption whose value is bound to depreciate over time. This can be applied to any consumer durable you wish to purchase, be it a car, home appliances etc. If you actually want to purchase such products, it is better if you can bring a discipline in your finances and be willing to maintain low or nil savings level if you want to be a lavish spender.
- A zero interest loan can be a suitable package if the product you’re willing to purchase is beyond your range. While choosing a loan it is important to factor in the real cost of the loan rather than the loan amount itself. Therefore, considering zero cost loans can be a better proposition. If the seller is providing you with a consumer loan evaluate the benefit of it with other options such as how much will a loan from the bank cost you? What is the rate at which you can avail a personal loan from the bank? Once you have evaluated your options go for the one that is the best resource at least cost.
- Ask yourself if you actually need a loan. If it is possible for you to pay for the product in full or up to the maximum level so that you need not burden your finances with a loan since a loan includes EMIs with interest rates, processing fees etc. If you can invest your funds into certain investment avenues where your funds can grow, try opting for that. Otherwise save your funds and purchase the product at a later date when you have enough cash.
- It is better to opt for a consumer loan if you believe that a loan is not going to burden your finances. If you are a private sector employee, all your expenses will be funded with the money that is left post tax. Therefore you will be spending a reduced amount and availing a loan will further reduce your level of savings.
- You can choose to avail a loan only if you have a reason to believe that the durable you are purchasing is more important to you in terms of its utility rather than a fad, and then the value of the purchase will increase making it worth the value for money.
It is true that when you make any purchase for yourself or for the household, there is a lot of happiness lurking around, which cannot be purchased. All you need to ensure is that your financials must not get hampered while you are trying to please your loved ones. Ensure that your dependency on credit is minimal and you try to finance your propositions by saving it prior you arrive at your purchase decision.