Should you go for zero interest finance schemes? :: Business Line

Compare the processing fee across various dealers before you finalise the purchase.

Planning to buy an LCD TV this Diwali? Besides the usual price discounts and freebies, retailers offer easy financing options at zero per cent interest. But should you opt for it?

Here are three important aspects that you need to understand before making a decision.

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LOOK BEFORE YOU UPGRADE

Don’t yield to the pressure from your dealer to upgrade to a high-end model. For instance, you may have decided to buy a 32-inch LCD TV, but the sales rep at the retail store may lure you into buying a 40-inch LCD TV instead by offering a zero per cent interest scheme for financing it.

Never give in, unless you think you can afford the luxury. Else, you may end up overshooting your budget and land yourself in financial stress.

For instance, let us compare the EMI for the 320-litre and 420-litre frost free refrigerators manufactured by LG. For a 12-month loan, retailers we spoke to in Chennai ask for a down payment equivalent to 4 months’ EMI.

Thus the EMI for a 320-litre refrigerator costing Rs 25,500 will be Rs 2,125 (down payment is Rs 8,500).

This is calculated by reducing the down payment from the total cost and dividing the same by 8. But if you want to upgrade to a 420-litre fridge costing Rs 46,600 - taking the same 12-month tenure, after making a down payment of Rs 15,533, you may have to shell out Rs 3,883 every month as EMI over the remaining 8-month period. So, never be tempted to buy an expensive high-end model unless your finances allow you to.

Check for the processing fee under the financing scheme. The zero percent financing scheme may not be an interest-free loan in the real sense. You may end up paying more for the same product.

DO THE MATHS

For instance, the financier charges you a processing fee on the total cost of the product. Though a few large dealers may offer you a lower processing fee, in most cases it can be as high as 1-2 per cent of the product cost.

When you opt for zero-interest financing, you may also have to forego any discount the product may carry, had you opted for an upfront payment. On the other hand, the money you are not shelling out at the time of purchase could instead sit in your bank account, earning you some interest.

Let’s understand this with an example. Say you want to purchase a 40-inch Sony LCD TV costing Rs 64,000 with a loan tenure of 18 months. You may have to make a down payment of Rs 14,222 (4 months’ EMI) with the balance payable in 14 monthly instalments of Rs 3,556.

If you opted for the finance, Rs 49,788 (the cost of the TV less the down payment) sits in your bank account earning interest.

Assuming a 4 per cent interest on your savings bank account, this works out to Rs 1,245 (calculated on the reducing balance of the cost over a period of 14 months).

But you may have to pay a processing fee of Rs 1,280 (at 2 per cent of the cost) for the finance.

By choosing the interest-free finance, you may end up losing Rs 35 (Rs 1,280 – Rs 1,245), in addition to foregoing the discount on cash purchase. So do the maths before you make a decision.

COMPARISON SHOPPING

Compare the processing fee across various dealers before you finalise the purchase. This is because processing fee varies across dealers. Select large dealers may offer you the product for a lower processing. If the interest-free loan should work well for you, it is important to identify the dealer who will offer you the lowest processing fee.

To understand this better, we compared the processing fee for financing a Sony LCD TV costing Rs 1,24,000 across few dealers in Chennai. A large dealer with a pan-India presence offered the product for processing fee as low as Rs 200, while another local retailer charged Rs 2,480 for the same product.