Thursday, 8 October 2009

Zero Finance scheme ? My foot !

This is festival season in India. Traditionally the season when Indian families tend to buy stuff that they neither need nor can afford ! The new two wheeler. Or maybe even the car. The new fridge – all the goodies in life that adorn showrooms the Ponnuswamy family passes by daily.

But , much as they might like to have it, they don’t have the money to pay for it. Cue to the wonderful world of financial innovation. Apparently the flavour of the season is what is called “zero finance scheme” ( with the obvious grammatical fallacy that if there is zero finance, there is no finance - why is it that these days I spot too many of them ??)

Sir – we have a zero finance scheme. No interest at all sir. Whatever is the cost of the goodie; you can pay in 24 easy installments. And see sir, no interest – total of your installments is the same as the cost price. Please sign here sir.

Now one of the blindingly obvious things that the human mind finds extremely difficult to grasp is that there is no free lunch. If something is too good to be true, it is usually too good to be true. Zero interest ?? The financial world is not exactly known for altruism.

Apparently the way it works is that zero finance schemes are available only at the full MRP. If you pay cash down, you get the usual discount that the manufacturer and the trade passes on in any consumer durables transaction. Voila – here’s the free lunch catch.

Madam – you don’t need that new flat screen TV. Even if you do, don’t believe this zero finance nonsense. You are usually pretty sharp when it comes to day to day grocery buying. Why are you so gullible when a smooth talking guy, wearing a tie, tries to palm off stuff like this. Just do the math madam. You can get it 15% cheaper with all those discounts, when you pay cash down. Did you notice that 2% processing fee for this magical zero finance scheme. If you now pay the full MRP in 24 monthly installments you are in effect paying 18% interest. Now do you really want that TV ??

17 comments:

Sandhya Sriram said...

i think many of us do understand the catch. but the fact is that we desire the luxury, we cannot afford to pay it cash down and can't go through the hazzle of a personal loan (which anyways come with an equally exhorbitant cost).

the fact of the matter is no one likes acknowledge their weakness whether financial or otherwise . I dont want to tell you that i bought in instalments cos i cant afford. so i first tell myself that i actually havent lost much coz i have indeed bought this at MRP/12. and thats what i would wish the world to believe

i somehow feel its a win-win. I am a social animal and certain things give me a perceived social status. i may not have the wherewithall to buy it cash down but for a premium, i can pay for it over a period of time. for the shopkeeper - its a double business - goods and services. But we all need to know where to draw the line keeping in mind what we can afford to repay.

athivas said...

Oh!So, that was the trick?? I always knew there was something tricky, was wondering what! Thanks for giving it in exact numbers!!

You must have now know the essence of tie (and perhaps, the coat) in business :P

Srivats said...

Thats the post for the season. Its eye opener for me, although I know there is a catch the need to buy and the belief " I aint no dumb, i brought it for 0% interest" lets me do such stuff. I always thought they need more sales to go on and thats y they offere such schemes.

But its also interesting to read sandhya sriram comment. I would love to see you answering that

Sabareesan said...

I am with Ramesh on the economics, but in real life there are aspirations, emotions, society.....
These options have basically bridged the gap between ability to pay in cash and middleclass life.
While I am frugal, imagine relocating to a new city, having to buy basic necessities - washing machine, refrigerator etc coupled with a steep rental deposit, life is not easy as Ramesh may make it sound, therefore there will be choices and it is upto us to choose what we may need to prioritize, just like a corporate strapped for cash may direct resources to what is more important.

Ramesh said...

@athivas - Oh yes, the tie makes all the difference :-)

@sri - Yes, sometimes they need the sales and do some real deals too. Remember BOGOF - Buy one Get one Free ??

Ramesh said...

@Sandhya - You are scintillating in your comments. You are very right - the consumer is never never stupid. probably the decision making process is exactly as you have described. Thanks for opening my eyes to this dimension.

Ramesh said...

@Sabareesan - A brilliant comment. I am indeed guilty of trivialising what is a complex decision process. What is there in life if we can't take an emotional decision or have a tall aspiration ? Yes; such financing can certainly make a midle class life that much more enjoyable. I stand corrected - I can rant about the misnomer of Zero finance, but I should never, even unwittingly, mock a consumer decision. Thanks for such a valuable comment.

Deepa said...

@Ramesh: I'll take your side here, thats the pitfall of being a Fin. guy! U can't help jumping to the numericals before anything else! :)

DA said...
This comment has been removed by a blog administrator.
thethoughtfultrain said...

Oh yes ... financial schemes shoved in the consumers face the minute we say "i want ... "!! :D How right you are - there is no free lunch! But Sandhya's point makes sense in some of the crazy purchases that we do. Humans that we are - we always want what is just above our reach! :-) Brlliant post and I kinda remembered "Lalitaji" of the old Surf ad advising consumers! :-) Thanks so much for doing all the financial Math for us ... it makes life easier - really!! :-)

Ramesh said...

@Deepa - Oh, we finance lot aren't that bad ! You wear your heart on your sleeve. And look at another finance cat, Sandhya :)

@thoughtful train - Yes, we always want more and businesses have made a fine art of keeping us there. Witness our buying everytime we go to the supermarket; we invariably buy at least one item we won't use !!
And I haven't pulled your leg for a long time, so here goes -you aren't supposed to be calling dashing men as Lalitaji :) flattering references to handsome heroes like ____ (please fill in the blank as I have no clue as to who they are), would be , wow :-). There you go, pulling the thoughtful train's leg is great fun :) :)

Ramesh said...
This comment has been removed by the author.
thethoughtfultrain said...

Oh no, I dint call you Lalitaji!! You are always pictured as one of the smart suave guys on IBN Money like Udayan! He is dashing, no? :D

Ramesh said...

@thoughtful train - Wow - you should change your name to the thoughtful sweet train. Look at her; within a minute of my pulling her leg she shoots back a compliment. Moral of the story - pull the thoughtful sweet train's leg often :)

Adesh Sidhu said...

True, as there are no free lunches, there are no zero interest free schemes. Consumer inevitably ends up buying product which is otherwise out of his reach. And rightly said in most of the cases he has forfeit his usual discount.

As in Hindi they say, door ke dhol suhawane...

Vinoo John said...

When you start our life I guess everyone wants to get things in instalments...Although I was lucky that except for a car we managed to get 0% interest from the employer!
Apt thought for the season!

Ramesh said...

@ Adesh - Perfectly apt saying ....

@Vinoo - Hi Vinoo; thanks for coming and your comment. Oh yes, the 0% interest from the employer is the one truly 0% scheme - a perk to be fully utilised !!

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