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5 reasons you should stay away from 0% schemes

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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 per cent finance schemes offered by some NBFCs (non-banking finance companies) with which he had bought a couple of consumer durables.

He blindly believed that the zero per cent finance schemes were in fact zero per cent 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:

1. What are they?
Till a few years ago there were many such zero per cent 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 (RBI) many banks have now stopped from offering such schemes for financing consumer durables. But still there are several NBFCs which continue to offer these so-called zero per cent finance schemes.

These schemes do tend to have a big influence if you are someone looking to buy something that otherwise would be well beyond your reach. You buy their theory of 'zero per cent 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 paying.

2. How do these schemes work?
First, these zero per cent schemes have hidden costs inbuilt. 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 payment. This apart, you will also be paying a transaction or processing fee under the zero per cent 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 per cent 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 six 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 per cent 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.

3. 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 per cent 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.

4. How to decide if the scheme is actually zero per cent
It is always better to ask some basic questions to find out if the zero per cent schemes are actually zero per cent. 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 per cent.

5. Are there any zero per cent schemes at all?
Well, there are schemes that could fall in the category of being zero per cent but these are available in a different form. There are some credit cards where if you spend more than Rs 5,000 with it, the credit card company 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 per cent. Unfortunately, this is the closest you could get to a true zero per cent scheme.

BankBazaar.com is an online loan marketplace.

Disclaimer: All information in this article has been provided by BankBazaar.com and NDTV Profit is not responsible for the accuracy and completeness of the same.

Story first published on: May 27, 2013 12:16 (IST)

Tags: zero per cent interest

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