Zero percent schemes

Yesterday, I had gone shopping with my mom - to purchase a microwave. The price of the microwave quoted by the shop was Rs. 15,000. Interestingly, there was a 12 month finance option available on it .. at Zero Percent Interest. The shop had done a brillaint job of putting up posters and pops all around the place to promote this grand scheme. As a customer you should be extremely hapy about this, right?

The math is quite different in this case. First, the finance option for the item is not 12 months, it often 8 months. Secondly, finance companies would charge 4 installments upfront (so you lose out on the interest that those 4 additional installments (of Rs. 1250 each) would have made over a 4 month period .. this amount comes to Rs. 62.50. Thirdly, you will be charged a processing fee (in my case, it was Rs. 800).

So there you go, in t(zero) you would recieve Rs. 15,000 but cough up Rs. 5,000 (1250*4) plus another 800 rupees in processing fees .. all totalling 9200 rupees of value recd. From t1 to t8, you will give Rs. 1250 every month to close the loan. Put these numbers in an excel sheet and use the IRR function, you find that the finance company has taken an interest of 22.7% in this so-called zero interest scheme.

I didnt settle for this finance 'scheme'. Instead used my credit card to pay for the microwave. The credit card gives me more flexibility to pay my bills and gives me reward points. Interestingly, credit card companies in India have started promotions of convertng these puchase into 6 month installment so that I can regulate my interest payout. I plan to do this, in a couple of days.