Facts about 0% EMI Finance Schemes

This festival season you might have decided to upgrade your television set from LCD Flat Screen to LED Smart Television or purchase Samsung Note Book / Apple Iphone / Nokia Lumia replacing your old Android Mobile Handset, etc. Attractive promotional schemes from manufacturing companies and retail stores will roll out in the market from this week as Navratri – the first festival of the season is commencing from 5th Oct, 2013 followed by Dussehra, Diwali and Christmas. When we look at the statistics of last few years, purchase of consumer goods through 0% finance schemes has attracted many customers and sales through this scheme has contributed 20-30% to top-line for retailers in the market. However, before you take a decision to purchase consumer goods and get trapped in some promotional offers we recommend avoid 0% emi finance schemes offered by banks or credit cards because there are some hidden costs and disadvantages attached to it, which we will discuss in this article. Now, RBI has also stepped in from 24th Sep, 2013 to halt 0% finance schemes offered by banks to purchase consumer goods.

Disadvantages of purchasing consumer goods on 0% finance schemes are as follows:

1) Processing and documentation fees

Banks charge one time processing and documentation fees from customers, while purchase on 0% finance schemes. The fees vary from bank to bank, but will be in the range of Rs 500 to Rs 1,000. So, this will be additional cost on products you have purchased.

Take an example, Mr Abhishek opts to purchase 42 inch LED Smart Television Set which costs Rs 60,000 from store. Now, he applies for 0% finance scheme to pay monthly EMI on his purchase. To apply for the EMI schemes, he shells out additional cost of Rs 1,000 against processing and documentation charges. Now, his LED set would cost him for Rs. 61,000 (inclusive of processing charges).

2) Pay interest rates on your purchase

As per information gathered from various retail stores, it can be said that banks are charging hefty interest rates from customers while purchase on these finance schemes with 0% EMI. Interest rates vary for six months and nine months tenor among banks. These interest rates are as follows: 

Banks	6 months tenor	9 months tenor
State Bank of India	4.25%	6.35%
HDFC Bank	5.2%	7.25%
ICICI Bank	4%	6-6.15%

Now, after RBI intervention in the 0 interest finance schemes to purchase consumer goods, banks such as SBI, Axis bank, Kotak Mahindra, etc have already withdrew zero percent facilities.

Taking forward Mr. Abhishek’s example, the cost price of Rs 60,000 for LED will have additional cost of interest expense over it. So, consider if he had opted to purchase LED with 6 months tenor (EMI instalments) from ICICI bank. The interest rate applicable will be 4% on his purchase. Now, EMI for 6 months will be Rs 10,117. So, at the end of 6 EMIs, total amount he pays off is Rs 60,702. So, purchase of RS 60,000 has now led him to pay additional cost Rs 1,702 (Rs 1,000 processing fee + Rs 702 interest cost).

3) Losing out on discount while shopping

Retail stores and shop dealers on roadside offer discount when you opt to purchase through cash or debit card. This discount varies on your negotiation skills and brand of the product you opt to purchase. I did a survey in few retail stores and dealer shops to understand cash discount they are ready to offer if shown interest to book the order immediately and pay full amount by debit card. Retail stores offered me cash discount in the range of 3-5% on purchase of LG, Panasonic, Toshiba, Onida, etc LED sets. On the other hand, dealer shops on roadside offer cash discounts between 5-10% while purchasing similar brands and models from them. But, getting a discount on Sony and Samsung LED’s is a difficult task as they are market leaders and have marginal operating price across all retail / dealer stores in India. However, it’s possible to get a price break or complementary gifts of Rs 2000 to Rs 2,500 on Sony and Samsung LEDs, but require smart negotiation skills to deal with the Store manager / Associates.

Next time, before stepping into a retail store to purchase any consumer good, get a best price for the same product from a nearby dealer store. Then, take a decision to purchase from a store which saves money from your pocket and gives better sales service.

Here, we can say Mr. Abhishek missed an opportunity to save Rs 3,000, assuming 5% cash discount on purchase of Rs 60,000 LED set. Instead, he paid Rs 61,702 for LED costing Rs 60,000 in the market.

Set your preferences before stepping out for shopping consumer goods

There are few questions which you require an answer to, before stepping out to purchase any consumer products in the market. There is a high probability you will be confused with various brands and features in the market. So, take an example of Mr. Abhishek, who decides to purchase LED television set. The points he would discuss with his family / wife will be:

• Size of the LED set required to be installed in drawing room
• Should we give preference to brand or additional features at best price?
• Whether we want to buy from retail store or nearby dealer shop?
• Payment option i.e. 0% emi finance scheme or cash (debit card)?
• Set a budget price for consumer product you intend to purchase.

Based on a survey at few retail and dealer stores, I would like to share some insights as follows:

• Associates at these stores tried to push products which have attractive features and gives them better commission (profit) on sales if you have not decided your preference before stepping out for shopping.
• Associate gives demo of branded LEDs like Samsung and Sony on request but makes them inferior in features while compare to other brands like LG, Panasonic, Toshiba, etc. Also, prices of Samsung and Sony are much higher compared to other brands, so consumer easily gets diverted to other known brands while purchasing to get additional features at discounted price compared to branded market leaders. So, here if you have set your preference clearly, you will not fall in the trap of seller while shopping.

Conclusion

Let us calculate in table the total savings Mr. Abhishek will have from purchase of LED on cash with discount.

Particulars	Purchase on 0% finance schemes	Purchase on cash with discount
Cost price of LED (Rs)	60,000	60,000
Add: Processing Fee (Rs)	1,000	0
Add: Interest Payable (Rs)	702	0
Less: Cash Discount (@5%)	0	3,000
Total Cost (Rs)	61,702	3,000
Total Savings (Rs)	4,702
Additional Expense Incurred (%)	8% (approx.) by opting for 6 months financing scheme

With purchase on cash, Mr. Abhishek has saved Rs 4,702 as computed above. This saving can be utilised for other expenses (shopping) or invest in short term FD to earn cumulative interest. So, for consumer benefit, RBI has also intervened and is now against 0% finance schemes on emi offered by banks at retail / dealer stores. They want shoppers (consumers) to do shopping on debit card/cash and get additional benefit of discount from stores. So, improve your negotiation skills to get the best price for consumer goods of your preference and enjoy your shopping in this festival season….!!!!!

The author has presented his personal views in this article through knowledge and interaction with people at few retail/dealer stores in Mumbai.