The downside of 0% interest EMI schemes





In financial parlance, you should never borrow to consume and worse if you are splurging on some electronic gadgets just to catch up with peers

Rajiv Raj


Often, what we perceive as economical always has tremendous economics behind it. Otherwise why would the seller be interested in selling something that which is fairly cheap to you? The 0% interest Equated Monthly Instalments (EMIs) was one of the few attractive schemes which had received strong acceptance, is a case in the point. Recently, Reserve Bank of India asked banks to stop 0% interest charging schemes that allowed consumers to buy goods on equated monthly instalments. Banks used to offer these special schemes to consumers to buy anything and everything from kitchen appliances such as induction cookers to even high end electronic gadgets such as smart phones, tablets and LED television sets.

In financial parlance, you should never borrow to consume and worse if you are splurging on some electronic gadgets just to catch up with peers. The basic tenets of financial planning suggest that you should not borrow to splurge. It can overburden and may limit any scope to borrow for something essential. However, things are changing and sometimes people prefer to buy things by borrowing if they increase their efficiency or save their time. For example, working women want to own a microwave oven and a sales executive want to own a smart phone. And banks sensed an opportunity in this.

They introduced dedicated schemes to sell these products to customers who can borrow. The only glitch here is that they are wrongly called 0% EMI schemes, where the consumers get the impression that they are not paying any interest. Banks were making consumers either pay down payments and service charges that would take care of the interest due on the money paid to product manufacturers or they were negotiating discounts deals with product manufactures, wherein the discounts were not passed on to the customers. In both cases, RBI feels that customer interests are compromised. Hence the regulator asked the bank to stop these deals immediately.

For many customers who were planning to buy a new LED TV or have decided to upgrade their smart phone in the festive season that started with Ganapati Festival, it was a bad news. If you too belong to this segment of consumers do not lose heart. RBI has done the right thing for you. Now you may not get the 0% EMI offer you were waiting for. But you will surely see some efforts to offer transparent deals by both the banks and the product manufacturers. Manufactures may offer the same discounts to you that were earlier available to banks. Banks can still offer funding to you on credit cards and through personal loans.

In essence, you can still access your dream gadget. New offers at lower prices are round the corner. But be careful. Do not go overboard while shopping. Ideally save and buy that smart phone you have been thinking of. But if you are keen to borrow, compare the offers across banks. Do look at charges such as processing and prepayment. You can negotiate on them and save money. Do not swipe your credit card too much. It is a dear source of money and if you cannot repay on time, it charges interest in the range of 28% to 36% per year. In addition, it pulls down your credit score, popularly known as CIBIL score.

So, this festive season make it a point that you will protect your CIBIL score, by being within your limits. RBI has helped you on this journey by helping you to take the first step by abolishing 0% EMI schemes and bringing down the temptation in front of you. Now, the next step has to be from you to safeguard your financial goal and create a spotless credit profile.

The author is Co-Founder & Director, CreditVidya

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