Are zero finance schemes as good as they look?

Says Lokesh Nathany, senior vice president-sales & distribution, Motilal Oswal Asset Management Co Ltd, “Zero finance schemes look very attractive on the face value. Psychologically, it appeals to the buyer that he/she is getting goods on equated monthly installment without paying any interest on the loan amount. During the festive season this tool is used by various companies to increase sales and a good number of buyers actually go for it.”

This is mostly because consumers, who are unable to afford the purchase of an item through own resources, find such schemes very attractive and useful as well. They want to stager their payment, but at the same time do not want to pay any interest for it. No need to say that such schemes meet their purpose to perfection.

The net result is that the company and the dealer get higher sales volumes, the financier gets customers and a larger loan book size, and the buyer gets to buy what he wants to through affordable installments. But the buyer also ends up paying more in the process.

“Therefore, buyers who can afford to buy with their own resources should not get lured by such schemes simply because they appear attractive. By making the full payment from their resources, they will get cash discounts which in most of the cases will be the same which they will be paying as interest by going for any zero interest scheme,” says Nathany.

However, if you must go for any zero finance scheme, you should ensure that any outdated or old model is not pushed through the scheme.

You should also check the maximum cash discount available if you are not going for any zero finance scheme.

There is also need to check the amount of the processing fee and other charges being levied on the customer in the name of documentation. Simply because at the end of the day, it is the total cost that should matter.

Are zero finance schemes as good as they look?
Having remained in a lull for a long time, zero percent finance schemes are back with a bang. And why not? Everyone -- ranging from consumer durable companies to finance companies to consumers - needs some push in these difficult times, and zero percent finance schemes are definitely a ‘win-win’ solution for all. Particularly consumers looking to buy home appliances and other such goods on easy monthly installments must be a happy lot now. However, before you go overboard, there is need for some caution.

But there is a catch there: While on upfront payments you can avail some or even hefty discounts in some cases, goods are usually sold on MRP (or on marginal discounts) while opting for any zero finance scheme. Besides, there is also some processing charge in most cases.

“You should always remember that there is no free lunch in life. Therefore, contrary to the common perception, all the parties involved benefit out of such schemes. There is nothing like ‘zero’ or ‘free’ in anything you buy. Similarly, zero interest is nothing but higher discounts that the concerned company or manufacturer offers to the bank or the lender or the financier who in turn passes it on to the end buyer,” says Nathany.

It is also known as interest subvention. For example, suppose a TV company wants to push its sales to the segment that can afford to pay in installments but do not have ready cash and also cannot afford the interest rate. So they offer higher discount to the dealer or the bank and they in turn pass the same to the consumer.

And last but not least, check the warranties and special conditions, if any, put or attached to the product.

“Customers should ensure that in the name of zero interest, dealers/companies are not charging higher for any product. They should also enquire and find out the real product price without finance options. This will give a fare idea about the benefit of zero financing,” says D D Sharma, senior vice president - research, Anand Rathi Financial Services.

Thus, any purchases that you make should fulfill your needs and aspirations, and should not be made just because they are available through zero finance or any other such schemes.
source - ET

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