Is Zero Interest Loan EMI is really Zero Cost

Now the festive season is on and if we see any shop, newspaper or online shopping portals everyone is offering Zero percent Interest Loan. We can also see zero-cost EMI offers all across the year but it looks more lucrative in the festive season. But is it really what the names suggest? Let’s understand the way it works and why vendors are so willing to offer it at zero percent. Understanding it will help us to make decisions based on actual facts rather than just the marketing gimmicks.

Generally, retailers offer three ways to buy any consumer durable product which are as given below:

1.     1. Cash down / Credit card payment / Debit card payment

2.    2. Zero cost EMI on your Credit card

3.    3 0% or low-cost EMI (from some financier/bank)

Now let’s understand how it works:

1. Cash down / Credit Card Payment / Debit card Payment: In the Cash down option the whole amount is payable at the time of purchase, since we are paying full amount at once so dealers offer some cash discount also (subject to our negotiation skills. In certain products some stores may charge some additional fee (1-3%) if we are paying by Credit Card instead of cash (debit Card or online fund transfer) payment.

In this option the benefit lies on how much we can negotiate on the discount when paying entire amount on our own, in this case we have better bargaining power as entire amount is paid fully at once so chances are high that we can get some discount which may not be the case in EMI options.

 

2. Zero cost EMI on your Credit Card: Most of the Credit Card companies also offer EMI options on certain products while purchasing from certain retailers. Sometimes, it may be zero-cost EMI, and, in some cases, they may charge you a fee called as processing fee.

Let’s understand how it works when we are buying anything on EMI through our Credit Card:

Option –(i): No Interest only Processing Fees:

In this the retailer says you can buy this Mobile at Rs. 10,000/- and pay EMI of Rs. 1000/- per month for 10 months and there will be a processing fee of only Rs. 500/- by Credit Card Company. Now the money has been taken in the name of processing fees although it may not be called as interest but we are paying it so it should be considered. If we consider total payment then the actual cost comes to 12% P.a.

Option –(ii) : No Interest but one advance EMI and Processing Fees:

In this the company asks us to pay Rs. 500/- as processing fees and one advance EMI of Rs. 1000/- for the purchase of Rs. 10,000/- . So actually, we are talking loan of Rs. 8500/- only. In this case the actual cost comes to 14.93% P.a.

If there are two advance EMIs then the cost comes to 19.11% P.a. and for 3 advance EMIs the cost will be 25.42% P.a.

 

3. 0% or low-cost EMI from some financier/bank: Many retailers have tie-up with some banks or finance companies and if you don’t have cash or credit card then they can offer zero percent loan EMI by talking loan from these banks/finance companies.

Now let’s understand why somebody is willing to offer you loan without any interest and what benefits they get out of it.

In these cases, the Financiers/Banks have tie-ups either at the Brand Level or at a Product Level, or sometimes at retailer level. In such scenarios, there are some special discounts that are only available to the financier when the customer avails of the loan facility.

So, let’s see how it works

Option –(i): No Interest No Processing Fees:

In this case let’s say we buy a mobile of Rs. 10,000/- and have to pay Rs. 1000/- per month for 10 months. However, in this the bank/financier gets Rs. 500/- as dealer discount which is not known to us. So actually, the cost comes to us same as in earlier case of 12% P.a. This dealer discount can be passed on to us if we are paying full amount in cash and are good in bargaining. If discount is high, say Rs. 1000/- then the cost comes to whopping 26.44% P.a.

Option –(ii): No Interest but one advance EMI:

In this the company asks us to one advance EMI of Rs. 1000/- for the purchase of Rs. 10,000/-. So actually, we are talking loan of Rs. 9000/- only. So, the actual cost comes to 14.93% P.a. (assuming Rs. 500/- dealer discount directly passed on to the financier/bank).

If there are two advance EMIs then the cost comes to 19.11% P.a. and for 3 advance EMIs the cost will be 25.42% P.a.

 

However, these 0 % interest loans are not necessarily bad provided we take a conscious decision and do not get into the marketing gimmicks and also ensure that:

• We actually need this product in any case and we are not relying on this loan alone to buy it.

• The financier or the credit card company is not going to charge any interest on such loans in future. It should be mentioned clearly in the documents/forms so as to avoid any future dispute.

• We pay the amount due on time. We should NEVER give in to the temptation of carrying the due amount to next month. This can entail heavy penalties like the interest of more than 3 % per month (which is about 36% to 42% p.a.) and can also spoil our credit score.

By following the above guidelines, we can actually turn these loans to our advantage by ensuring that there is no additional outflow from your pocket due to the loan.