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Planning to buy a smart phone, LED television or air conditioner? When you visit the dealer, you are bound to come across zero-interest financing schemes for these goods which help you shell out the purchase price in easy instalments. But how does this work?
Today, zero-interest schemes fund 11 per cent of total consumer durables purchases. Out of the total consumer durable purchases of over Rs 36,850 crore annually, products worth over Rs 4,053 crore are bought on zero per cent interest financing.
A consumer durable loan with zero per cent interest will usually carry a processing fee. One can avail loans ranging from Rs 7,500 to Rs 5,00,000 on various categories from durables stores in the country. All the customer needs to do is choose his desired product and approach the in-store representative for loan approval. The partnership between the manufacturer of the appliance, the retailer and the financing company, aided by technology, enables the financing companies to approve loans through a simple, hassle-free and quick process.
fast processing
The customer then has to pay the defined down payment and the remaining amount is divided into equal monthly instalments (EMIs). Most companies also provide online services to make the process more efficient. Zero per cent interest finance works on spot approval with minimum documentation and fast processing.
Financing companies usually allow customers to choose from a range of loan tenors, varying from 12 to 18 months. This brings down the cost of ownership of any appliance. On occasions, it can also help the customer trade up while making a purchase.
For example, if a person had a budget of Rs 40,000, in case he opts for a cash-down option, he would have managed to get a 32-inch LED TV. If he can afford the instalments, with a zero per cent interest consumer durable loan, he can now trade up to a 46-inch LED and bridge the gap with the loan.
Under zero per cent finance, the financing companies tie up with the manufacturers and large retailers to offer loans at a fixed interest rate. The manufacturer actually bears the cost of loans i.e. the interest, while the customer is offered zero-interest loans. These arrangements are beneficial to the manufacturers as such schemes enable them to promote their product more effectively.
(The author is President, Consumer Business, Bajaj Finserv Lending.)
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