Who is making more money – you or your bank?

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Amazon / Flipkart sale had rocked the online shopping this festive season. While a lot had been debated over a few months on the impending slowdown in consumption these sales have attracted crores of consumers to buy stuff.  What is surprising is if there is no liquidity from where did the money come for this shopping?  Is it offers like Zero Rate of interest EMIs? Swipe now, pay later facility? If yes, I wonder how will anyone give a freebie in business?

We might argue saying to promote a sale, they must be giving extra incentives and bulk consumption will average out their cost, etc.  However, if you recall, the most famous quotes in history, “There’s no such thing as a free lunch.”  What the adage refers to is the idea that it is impossible for a person to get something for nothing.

While we know & understand that there is no free lunch, yet we get excited with the offers that come in front of us to buy stuff at 0% Interest on EMIs.

Many of us buy most of our household items like electronics/laptops/ mobiles etc. on EMIs with 0% rate of interest.

Do you think it is really 0% and you don’t pay anything extra to buy the product now and pay it in installments?

As you know, there is no free lunch for anyone, How these financing companies give you an option to pay in installments and don’t charge you interest.

Few important points to note in this arrangement are :

  1. Manufacturers or Retail stores share some part of their profit margins with these finance companies to increase the number of sales.
  1. The cost value of the product is increased if taken on EMI vs immediate payment.
  2. In some instances, a processing fee is charged to start this EMI and this processing fee is indirectly the interest you pay

To give an example, Suppose a customer opted for 0% finance to buy an electronic device worth 10,000/-.

Product Cost Processing Fee EMI  (6 months) Effective Interest
10,000/- 500/- 1670/- 10% approx.

Buyers, therefore, need to be very careful before falling into the zero percent interest rate trap and spend some time doing their math in order to understand how much they are paying for a facility that looks very attractive from the outset.  Instead of falling into this trap, it is better to plan the purchase rather than impulsive buying depending on future income.

Start saving for the purchase beforehand rather than making your banker/financier rich at your cost.

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