Zero per cent EMI schemes: Here's the catch!

The zero per cent EMI option helps the bank and the manufacturer more than the consumer. This is what the catch is!

Often, what we perceive as economical has tremendous economics behind it. Otherwise why would the seller be interested in selling something that is fairly cheap to you? The zero per cent interest Equated Monthly Instalments was one of the few attractive schemes which had received strong acceptance, is a case in the point.

Recently, the Reserve Bank of India asked banks to stop the zero per cent interest charging schemes that allowed consumers to buy goods on EMI. 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 specially so if you are splurging on some electronic gadget 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 that increases their efficiency or saves them time.

For example, working women want to own a microwave oven to save on cooking time or a sales executive wants to own a smart phone for better productivity. And banks sensed an opportunity in this.

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

Financiers of such products introduced dedicated schemes to sell these products to customers who can borrow.

The only glitch is that they are wrongly called zero per cent EMI schemes, where the consumers get the impression that they are not paying any interest.

Banks were making consumers either make down payments and pay service charges that would take care of the interest due on the money paid to product manufacturers.

Or they were negotiating discount 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 planning to buy a new LED TV or have decided to upgrade their phone this festive season, this was 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 zero per cent 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 to buy that smartphone you have been thinking of. However, 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 per cent to 36 per cent per year. In addition, it pulls down your credit score, popularly known as CIBIL score.

So, this festive season make it a point to protect your CIBIL score, by spending within your limits.

RBI has helped you in this journey by helping you to take the first step by abolishing zero per cent EMI schemes and reducing 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.