Day in day out we see ads all over offering everything from a toaster to a car at zero percent finance. And with the advent of EMIs (Equated Monthly Installments), even the middle class can now dream of owning a car; the big and bold 0% finance just makes it all the more tempting.
However, there may be a lot more to the zero percent schemes than meets the eye. What you initially think is a great offer, may end up costing you more money in the long run. Remember, the popular saying: “There is no such thing as a free lunch!”
How does the zero percent scheme work?
At the outset, what you need to know is that there are ALWAYS hidden costs inbuilt in such schemes. 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 a 39-inch LED Full HD television that costs around Rs. 48,000. And of course, the zero percent finance scheme is too tempting to refuse. So, as per this scheme you are required to pay the entire cost in 6 EMIs of Rs. 8,000 each with Rs. 1000 as processing fees. This is a standard charge that all finance companies will charge.
What most consumers don’t know is that cash payment entitles the customer to a discount. Let’s say, in this case it is Rs. 2,000.
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 TV on a zero percent finance scheme you are not entitled to the cash discount of Rs. 2,000! So, overall, you will end up paying Rs. 3000 more.
By chance if you end up missing an EMI, the interest charges are back-breaking! Yes, companies actually charge anywhere between 24% to 36% as interest charges. To put things in perspective, a car loan is available at around 11.5% and a home loan at around 11%. This is topped with late payment fees and taxes. If you purchase a product on an EMI scheme offered by your credit card company, it is most likely that there will be a pre-closure penalty in the range of 2.5% to 3%.
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. If the answer is ‘no’ for both the questions then you might consider yourself lucky that the zero percent schemes is actually zero percent. This is as rare as a blue moon though.