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Buy Now, Regret Later

Zero percent schemes mean that you forfeit cash discount and there is a percentage involved

Harsh Roongta

14 Aug 2007

The old adage that 'there is no such a thing as a free lunch' aptly describes the zero-percent-interest schemes. These schemes have become a norm for consumer financing in recent times in the Indian market.

The main attraction of such schemes are that they influence you to purchase consumer goods that could be more expensive that your wallet size. The lure of zero percent interest is an added attraction that makes you feel that 'YES' I am not paying more and still getting a 'bigger and better' product.

So let us a take a look at the other costs involved in these schemes that should be influencing your decision. For one, there would be some processing/transaction charges involved. Moreover, you forfeit the cash discount that you would have got otherwise got from the retailer.

According to an industry analyst, processing charges incurred are in the range of Rs.600-700 for loan amounts up to Rs.30,000 and at a rate of 2.2 per cent for loan value beyond Rs. 30,000. Moreover, most of these schemes do not provide full finance but require the consumer to make an upfront payment of the first four EMIs with credit being provided the rest 8 months. A point to be noted is that under these part-financing schemes, the ad-valorem processing charges are levied on the original price of the product and not on the price after deduction of the advance EMIs.

Now, let us consider the case of the purchase of a branded flat screen 21 inch CTV model:

Scenario 1


CTV purchased on cash basis



Cash discount @ 5%


Net price payable


Scenario 2


CTV purchased under zero-percent interest scheme



10 EMIs of Rs.999 each

Forfeited cash discount


Interest payable


Processing charges


Cost to consumer


Premium paid by consumer opting for credit


In the above example, this price paid by the consumer opting for credit is around 13 per cent higher than the price payable in the cash down scheme.

That takes us to the next question as to how the financier makes his buck in these schemes because though there is a processing fee attached to these schemes, the institutions also have to incur a some cost ?

According to the industry analysts, although the financiers (mostly NBFCs like key players being GE Money, CitFinancial and Bajaj Finance) do forgo interest income under these schemes, the loss is more than compensated by subventions from the manufacturer (whose brands the financier has agreed to finance) and dealers.

The dealer discounts forgone by the consumer opting for a finance scheme, is also earned by the financier, while the processing fees allows the financier to more than cover the costs incurred on facilitating the credit for the consumer. Moreover, the small ticket size (normally in the range of Rs.15,000-20,000), and the shorter tenure of loans also mean quicker turnover of funds for the financier. On an average, the tenure is normally in the range of 8-10 months (could be higher for higher-end durables such as LCDs/plasma TVs etc.) based on the value of the product.

However the popularity of such schemes cannot be denied. Market sources say that despite being costlier in some ways, consumers prefer to go these staggered payment schemes have been highly successful in pushing sales and expanding the market for the durables with almost one-half of the sales of CTVs and refrigerators. This is primarily because of the fact that purchasing through credit cards is very expensive as compared to purchasing through these schemes.

Also, the success of these schemes can be attributed to the availability of credit at the point of purchase, minimal paper work, small ticket size and hence a not-so-stringent eligibility criteria.