Wednesday, October 7, 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 ??