Zero interest, also known as zero per cent interest, is a highly competitive interest rate offered by institutions to attract potential buyers or customers. Credit card issuers and sellers of high-end products, such as electronic appliances, offer such schemes, which allow customers to purchase items on interest-free EMIs.
Let us better understand what is zero interest and how it works.
What is zero per cent interest
Typically, ‘zero per cent interest’ refers to promotional interest rates offered by sellers and financial institutions to attract consumers. Businesses and institutions selling big-ticket items, including home appliances and cars, offer these plans to grab eyeballs. While such interest rates may seem lucrative, you must be wary of hidden fees and charges. Customers must also read the fine print; such incentives are usually offered for limited periods, such as 6–12 months.
Hence, you must ensure that you can fully repay the debt after the expiry of the promotional period. This is because customers tend to underestimate the long-term cost implications of such purchases.
Who qualifies for zero per cent interest
Can anyone buy products on zero interest? Typically, you would need a high credit score to be eligible for a zero interest loan. This is because businesses usually do not offer zero per cent interest to borrowers who either do not have a track record of repaying their debt on time, or have defaulted on their loans in the past. However, this requirement varies from one lender to another.
Breaking down zero per cent interest
Let us now try and understand what is zero interest in greater detail. Online and offline stores often provide aggressive financing packages to incentivise consumers with good credit scores to purchase big-ticket items. For instance, if you are thinking about buying a large-screen TV that costs around Rs. 1.5 lakh, the retailer can offer zero per cent financing for a specified tenure. This allows you to afford the product, even if you don’t have instant access to funds to purchase the item outright.
At the same time, these schemes might not be as affordable as one would initially imagine. This is because the zero per cent interest rate is usually valid for a limited period, like 6–12 months. Once the promotional period ends, any balance amount will usually incur high interest rates. Thus, if you do not pay the entire amount within the promotional period, you will find yourself making higher monthly payments.
In essence, any one offering zero per cent financing, from retailers and car loan providers to credit card issuers, rely on the prospect of you being unable to repay the entire amount before the end of the promotional period. This allows them to charge a significant amount with high interest rates afterwards. Additionally, certain sellers will increase the upfront price of the item before providing it under flexible financial terms. In such cases, the zero per cent interest offer is misleading.
Implications of zero per cent interest
Let us now look at a real-world example of how zero per cent interest works and its implications. Let us assume you are shopping for a new, state-of-the-art TV set. You wish to purchase it from a store offering zero per cent financing for the first twelve months, as this allows you to afford the product, which costs around Rs. 1.8 lakh.
Firstly, the product, which comes with a hefty price tag might be available at a cheaper rate of Rs. 1.5 lakh elsewhere. This implies that while the seller promotes it as zero per cent financing, it inherently comes with a high interest rate. Additionally, if you do not pay the entire amount within the promotional period, you will be saddled with higher interest, resulting in increased payment burden.
Thus, while the ‘zero interest’ concept works in favour of the customers, you should read the fine print and understand the implications. Additionally, customers must ensure that the entire payment is made before the end of the promotional period.
Conclusion
Before falling for any marketing gimmick, you must first understand what zero interest is. Similar to the ‘Buy Now, Pay Later’ scheme, zero per cent interest financing is a marketing tactic used by businesses to attract customers. This financing option is often bundled with products that the average customer may not be able to afford otherwise, such as a new car or high-end home appliances.
If you repay the amount before the promotional period ends, you won’t have anything to worry about. However, in a lot of cases, borrowers are not able to repay the entire amount within the specified period, resulting in higher interest rates or the addition of the deferred interest into the balance due. Thus, you must read the terms and conditions carefully before opting for zero interest loans or buying products on zero per cent interest.
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