Over the past 6 months, various companies including
Apple,
Samsung and
Micromax
went on an aggressive marketing drive that was based around the “0%
EMI” tagline. Consumers, young and old alike, were attracted by the
possibility of buying the device of their choice, by paying small
amounts of money over a prolonged period of time. That too without any
overhead costs. Who wouldn’t?
So when the RBI on Wednesday banned zero
per cent interest rate EMI schemes for purchase of consumer goods, it
came as a shock for many people.
What would possibly have been wrong? The
companies were sacrificing their interest money just so we could get
our dream products easily no? No.
The very concept of zero per cent interest “is non-existent,” the RBI said. So how were the companies offering such schemes?
The answer here lies in that
“negligible” processing fee that the companies/showrooms charged when
you opted for the EMI schemes. In the zero per cent EMI schemes offered
on credit card outstandings, the interest element is often camouflaged
and passed on to customer in the form of processing fee.
Explaining the zero per cent EMI schemes
on credit cards, Gaurav Mashruwala, a certified financial planner,
said, “When a person buys a TV set for Rs 60,000 and makes full payment
in cash, the dealer gives him a discount say of Rs 5,000. However, when
the same TV is bought in instalments with a credit card, he is not
entitled to any discount which is the earning for the bank.”
As
BankBazaar
explains, these zero percent schemes have hidden costs inbuilt in them.
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 cash. This apart you will also be paying a transaction or
processing fee under the zero percent 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 percent 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 6 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 percent 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.
So ultimately, it all came down to false
advertising and clever marketing. The consumer was led to believe that
he/she was getting a fantastic deal whereas the company was earning way
more than they would in case of a down payment. These schemes helped
companies attain double digit growth as far sales were concerned.
No wonder they are aggrieved by the RBI’s decision. Well done, we say.
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