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Remember, there is no free lunch in the financial sector

Let me share a short story on the value of Zero, which I picked from Brainly, the knowledge-sharing community portal where 350 million students and experts put their heads together to crack their toughest homework questions.

One day, a famous mathematician convened a meeting of numbers. All the numbers, except Zero, came for the meeting. Zero was hiding in an unknown place. The mathematician ordered all the numbers, "Wherever Zero is, I want you to go and find him out and bring him to this meeting immediately". All the numbers began to search for Zero. At last, after a long search, they found him hiding himself behind a tree. The numbers caught hold of him and presented him before the mathematician.

The mathematician said, "Why were you hiding? Why were you afraid to attend the meeting of numbers?”

Zero started crying and said, "Sir, I am Zero. According to people, I have no value and so no one cares for me or respects me. This hurts me a lot. That is the reason why I was not inclined to attend this meeting.”

The mathematician thought for a while and called the number One (1) and asked him to stand in front of him. Looking at Zero, the mathematician asked him, "Tell me, Zero, what is the value of this number?"

"One," replied Zero.

The mathematician then asked Zero to stand to the right of One. Looking at the other numbers, he asked them, "What is the value of this number?"

"Ten," replied all the numbers in unison.

The mathematician then asked all the Zeros to stand to the right of One, one after the other. Every time a Zero was added to the right of One, the mathematician would ask the other numbers the value of One. As the number of Zeros increased, the value of One also increased, that is to a hundred, a thousand, ten thousand, a lakh and so on.

The mathematician said to the Zeroes, "When each of you stood to the right of One, one after the other, the value of One increased. Any number by itself has very little value. Its value increases only when another number is put beside it. You think that all by yourself you have very little value. But when you come along with some other number, you increase not only your own value but also that of the other number. Didn't I just prove that to you?"

Zero understood the point made by the mathematician. He was happy that the notion of the people that Zero has no value was baseless and wrong.

The point to share this story is that nowadays we find social media and other media channels (electronic as well as print) are abuzz with announcements from various offline and e-commerce platforms about bumper offers and huge discounts for the upcoming festive season wooing a wide range of consumers. Notably, the festive season has always been important to brands, especially to e-commerce players who line up big bumper discounts, look for more retail brands to partner and ramp up their product offerings. One of the attractions they sell is the ‘no-cost EMI’ or finance facility for a product purchase at Zero percent rate of interest.

How is this possible for a company to offer a loan facility without charging any interest?

It is possible because zero percent financing bears a cost! Let me share an example of one of my acquaintances who was lured to the zero percent offer but was charged upfront as processing fee to avail the offer.

He approached a dealer to purchase a laptop costing around Rs. 45,000. The zero percent (interest free) offer envisaged that the payment was to be made in a spread of six equated monthly installments (EMIs) of Rs.7,500. But he was asked to pay Rs.1,000 as processing fee to avail the offer. Not only this, he also learnt the laptop was available at a cash discount of Rs.2,500.

So in the backdrop of cash discount and processing fee, he was actually availing a finance facility of Rs.41,500, but had to repay Rs.45,000. That means, he was paying Rs.3,500 for zero percent interest offer!

So, these zero percent offers are loaded with invisible costs. It’s simply a gimmick put before us through powerful ad campaigns tailored jointly by manufacturers and the dealers to get customers in the door.

What are no-cost EMIs?

Some companies pitch loan offers at Zero percent rate of interest and some call it no-cost EMI offer. They play the trick with the nomenclature. To elaborate it further, no-cost EMI is an interconnected system between a retailer, bank/financial institution and the consumer. The consumer can purchase products and pay for them in monthly installments without any additional interest cost, the bank finances these purchases and earns interest income and the retailer shares a portion of its margins with the bank and the retailer gets increased sales. Here consumers do end up paying some cost depending on the pricing of the product. Retailers typically offer two options to customers. If a consumer wants a certain discount, he/she has to make an outright purchase of the product. In a no-cost EMI option the retailer offers the same product for full price (without any discount) with an EMI option.

Notably, there is a possibility that retailers may load the interest component into the actual price of the product and present a no-cost EMI for consumers to take advantage of the flexible payment option.

Is Zero percent or no-cost EMI facility having Reserve Bank of India (RBI) backing?

No, the practice has no backing of the law. In the RBI books, the concept of zero percent interest or no-cost EMIs does not exist. So, the fair practice demands that the consumers be made aware by the companies about the value of Zero in their offerings. Otherwise its against the basic principle of the fair business practice code and would amount to exploiting the vulnerable consumers.

What are the costs if a consumer delays payment of EMI?

If a consumer is not able to stick to the given timeline for full repayment of the loan, then he/she may be charged interest amounts. These interest rates are commonly above 20 per cent, as it will be charged on the original loan amount and not on the outstanding balance amount.

So what are the precautions to be taken while availing Zero interest or no-cost EMIs facility?

The basic thing is to understand the fine print of the facility. Let it be clear that there is no free lunch in the financial sector. It’s a gimmick and in almost all cases the consumer is paying the full price of the product, plus the taxes and other charges as may be applicable. However, in absence of adequate finances, a consumer has an opportunity to buy useful products that add value to their lives.

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