What could be better than a 0% interest rate scheme?

You want to buy a music system that costs Rs 30,000. You don't have the money. The dealer tells you you can pay small amounts every month. Over the next one year, you can pay Rs 2,500 every month. Within a year, you would have paid the entire amount.

Interest rate: Nil.

Does the dealer lose out?

No, he does not.

So who does?

You do.

No discount

When my friends went to buy a double-door frost-free refrigerator this year, they were told the price was Rs 18,000.

Since they were willing to pay the entire amount upfront in cash, they bargained for a discount.

The dealer will always give you a discount if you are paying in cash.

They managed to get it for Rs 16,500, a cool Rs 1,500 off along with free home delivery. But this was only because they were paying cash. If they opted for the dealer's 0% interest scheme where he told them they could pay Rs 1,500 over the next one year, they would have ended up paying the entire Rs 18,000.

When you opt for a 0% interest scheme, you get no discount.

If you pay the entire amount upfront, the discount is yours.

Since the dealer has to make a profit, he will not sell it at the invoice price (the manufacturer's cost price). Instead, he will quote you the ex-showroom price, which is much higher. This is the manufacturer's suggested retail price.

If you take the 0% rate scheme, you will not get the difference between the two. If you pay cash down, he will give you a rate lower than the ex-showroom price but higher than the invoice price. This way, he makes a profit and you get a discount.

Processing fee

With a zero interest rate scheme, not only do you forego the discount, you have to pay a processing fee. If the fee is 1%, it would be Rs 180 on the Rs 18,000 refrigerator. If it is 2%, it would be Rs 360.

• How good are the cash back schemes?

Advance installment scheme

Say you are buying something that costs Rs 1,00,000 and you are getting a loan at 8% per annum.

If you opt for a one-year tenure, your EMI will be Rs 9,000 per month.

EMI is the Equated Monthly Installment. This is a combination of the interest rate and principal amount. It will stay constant throughout the tenure of the loan.

Now, with the advance installment scheme, you will be asked to pay around three EMIs upfront. So you pay Rs 27,000 upfront and the balance nine EMIs over the next nine months.

However, you have paid much more than required. Since you are paying Rs 27,000 upfront, why are you being charged interest on the entire amount of Rs 1 lakh?

Let's say you told your dealer you can only pay Rs 27,000 upfront. You ask him for finance for the balance Rs 73,000.

A loan of Rs 73,000 at 8% per annum will give you an EMI of Rs 6,570 per month. This means you pay a total of Rs 1,05,840.

If you went for the earlier option of Rs 9,000 per month, you would end up paying Rs 1,08,000. This is a difference of Rs 2,160.

If you are considering such an option, don't opt for the advance EMI scheme. Go for the margin payment scheme instead. This means you pay a fixed amount upfront and the balance is given to you in the form of a loan.

Shop smartly

This is the season when everyone shops. Indulge yourself, but make sure you get a smart deal. Don't get shortchanged.

Your best bet will be to pay for whatever you buy upfront. If you really do not have the money, ask him how much you will have to pay every month for a zero interest rate scheme and how much will a margin payment scheme cost.

The zero interest scheme will generally not be for more than a year while the margin payment scheme could be for 18 months to two years (depending on how expensive the product is).

When you compare the EMIs, do so for the same tenure (of one year). Also, compare the processing fees.

Then make your choice.

Happy shopping!