Make the most of zero cost financing

Make the most of zero cost financing

If you are on a Diwali shopping binge amidst festoons, discount offers and zero-cost financing options, and choose to pay the full price upfront for what you buy, make sure you ask for a discount, as the price on offer includes the interest cost of financing the purchase. Take a mobile handset offered at a price of ₹15,000, the retail price after a claimed discount from the normal price of ₹17,000. For zero-cost financing to work, the interest cost must either be collected as processing fee, or, if such a fee is not charged, built into the retail price. Assume the phone is offered at 12 equated monthly instalments of ₹1,250. If the rate of interest charged is 17.65%, the interest cost would be ₹2,250, leaving the price at which the phone should be sold without financing at ₹12,750.

Sale of the financed phone would also leave the retailer with a margin, even if thin. But on the sale of the phone at ₹15,000 paid upfront, the retailer gets a very handsome margin. If the savvy customer bargains for a discount, the retailer would be happy to part with a share of the extra margin he has on a phone sold without financing. In this zero-cost finance scheme, the manufacturer, the retailer and the finance company collaborate. These retail loans do not pose any undue risk to the financier, given that consumers pay mostly by credit card and the verification of the customer and the repayment mechanism are in place. Card-issuing banks would be daft not to collect their fees for servicing the loan.

RBI had, in 2013, banned banks from offering 0% EMI schemes on retail products, arguing that the interest cost is merely camouflaged and zero-cost financing does not exist. Nevertheless, banks have been trying to introduce variants. Customers should turn savvy, and insist on getting the discount they are due when they pay the full price upfront.