Well, RBI has recently banned 0% interest EMI schemes recently. But do you really know what is the hidden business secret behind this?
Last few years the market was flooded with calls to buy LCD/LED TV, Smartphones, IPads, Digital cameras, washing machines, etc at 0% interest rate. It typically works like this,
1) You choose a product, say priced Rs. 60000/-
2) You choose a financing company, a representative from that company will be sitting in the showroom itself.
3) You fill the forms. He/she will be showing you equated EMIs for 6 months- Rs. 10000/- for 6 months.
4) They will charge you a small processing fee of 4%. which is Rs. 2400/-.
5) Product is yours. The item will reach your home and you will pay installments for 6 months.
There is another variant to the above where Rs. 60000/- will be divided into 9 instalments of Rs. 6666/-. You will be asked to pay 3 installments in advance and remaining 6 as interest free EMIs.
No matter what, you will be happy because,
1) You got financing of Rs. 60000/- free of cost.
2) If you consider processing fee, it is just Rs. 2400/- which is not even working out to be 4%.
Only a finance expert can explain you the reality. The reality is,
1) You paid 8% interest, not 4%. Because the money is repaid in 6 months, not 1 year. Interest rate is always mentioned per annum.
2) Wait, is it all? If you deposit Rs. 60000 to a bank at 8% interest rate, does the bank give you the 8% interest on the same day? or after 365 days? It is after 365 days, right? But here you have paid 8% flat return instantaneously. What is this actually worth after 365 days?
Ok, this is a bit confusing right? In simpler terms, the bank or financing company has lend you Rs. 60000/- at an interest rate of more than 13%, if you had paid 4% as processing fees instantaneously.
It is all illusion here!
Also, such schemes attract you to buy products that you otherwise will not buy.
So friends, please be careful. Don’t buy a costly product simply because some one says 0% interest EMI. Buy a product that you actually need and you can afford to buy.