Zero Percent Interest On EMI – Myth Busted

Yesterday, my friend, Ajay called me to tell that he is going to buy a new laptop for his sister and he asked me that would I be free in the evening to accompany him to the Electronics Shops. I said, sure …I am going to come.
On due time we met at the doorstep of the Local computer shop. I asked him, Ajay, What is your budget for the laptop? He said that he would like to buy the laptop on EMI option and he already selected a masterpiece from the house of Lenovo to gift her sister on her birthday.
After few moments of chit-chat, we finally entered into the Shop. A young sales person greeted us with a warm smile and asked, how he can assist us today. Ajay declared that he would like to purchase a Lenovo make laptop costing Rs. 30,000, with EMI payment option.

The sales man replied that EMI is available on all electronic products having the price tag above ₹10,000. He said that the purchase of laptop will be financed by zero percent interest option. We need to select one  from the available laptops from the display, and he will arrange the finance for this laptop with minimum down payment.

Finally, after going through the features of four laptops, Ajay settled down to Lenovo idea pad model and, the sales person told us to visit the finance guy sitting near the payment counter.
We moved to him and he asked the model name of the laptop that we have selected. After checking the price from his price-book, he said, sir we can offer you 12 months EMI option in which down payment will be equal to the total of first four months installments plus Rs.1200 extra as a service charge, and balance amount can be paid in eight months starting from the end of succeeding  month. You can pay the down payment using cash mode or debit card right now to take your delivery instantly. To avail the EMI option, you have to sign an ECS mandate to ensure that installments are deducted seamlessly from the bank account.
Ajay did all the formalities and made the down payment using his SBI Debit card and, then we moved to the sales counter to take our delivery. He recently made some money online which was received in his SBI bank account. While the sales person was packing the laptop, Ajay whispered happily, I bagged a deal, I do not need to spend an extra penny to get this financed. I remained silent and mesmerized in the thought that how can a profit making finance company forgo interest on the financed purchase.
In the evening, I made a call to Ajay to know the amount of down payment he made and monthly installments that he will be required to pay. He told me that he paid a sum of Rs. 11,200 including the processing fees of Rs. 1200.
I replied, you did not get a zero percent deal over there, rather you have already paid the interest in advance for your purchase at the time of making down payment. Let me tell you the whole concepts of EMI to help you understand this matter.
The Equated Monthly installment is commonly known as EMI, where the buyer pays off his debt on a periodic payment basis. The seller charges an interest to the buyer to mitigate the finance cost.
In general, interests are spread over all the installment s. Now, as a marketing strategy, the seller offers EMI scheme to the buyer claiming that zero percent finance will be offered i.e zero percent interest on EMI, but in reality, he charges interest amount in the name of processing fees or transaction fees.
It may also be possible that, if the buyer chooses to purchase the goods on the cash basis then he will get a discount, which is not available if EMI option is chosen as the payment mode.
You can construct an EMI plan by either flat rate method or Reducing Balance method. In flat rate method, interest amount on the principal amount is calculated and added with the principal loan amount, and thereafter the total amount is divided by periods of payments to find out EMI. On the other hand, reducing balance method allows the reduction of principal on each installments payments, which reduces the interest amount on every consecutive installment. Generally, an amortization schedule is prepared to calculate the principal part and interest part in each installment.
Therefore, You have already paid interest on your laptop purchase which is termed as hire purchase in the commercial world. However, the joy that we get on purchase of an expensive item without shelling out a hefty amount at once is worthy enough for payment of this interest amounts. 
Readers, please let me know your experience of first zero percent interest on emi purchase in the comments section below.
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About KOUSHIK DAS

I am Koushik Das, and I live in Kolkata, India. I am a passionate personal finance blogger at iplancash.com
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