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Before the globalization took place in 1992, We Indians used to believes in saving most of the earning. A study suggest that as much as on an average 50% of income was used to save by people before globalization. We Indians never had that passion for high lifestyle as we have today.   

Today the scenario has completely changed. The average saving rate of Indian People has come down to approx. 34%. All Thanks to our shopping fever. We have changed or in other word we can say that we have transformed our taste of luxury in to the taste of requirement. Today we are more flashy and flamboyant. There is no doubt that, today Indian Economy has become consumer driven economy where in, the consumer durable products play important role in driving our economy. It is in the interest of our Producer, Seller and Finance Company that we keep on shopping; hence they come up with innovative ideas for selling the product. One of such idea is ZERO PERCENT FINANCE (“ZPF”).  This is really a masterpiece I must say. It challenge our common sense, I mean how can one company offers you product at zero percent finance? Are they doing charity??  When I came to know about it, I was very curious to know the real mathematics behind this deal. I am very much sure when I conclude with my article you won’t ever buy any product on ZERO PERCENT FINANCE.               

Let’s start with one Illustration (This is real example, all cost, interest rate scheme are available in today’s market and everyone can availed this offers.) –

Mr X wants to buy a television from local store, The cost of the TV is Rs 36,000/-, If you pay full amount at once then you will get Rs 2,000/- cash discount. So final cost is Rs 34,000/-. I guess it is sound deal and Mr X should grab it. But no someone has told him about ZPF scheme. The scheme is Mr X will get TV on ZPF by paying small amount of “12 EMI” and that too at zero interest rate.

The weird and difficult to understand mathematics comes in to picture here. First he has to forgo the cash discount of Rs 2,000/- once he choose ZPF option ( All dealers and Finance company have that kind of mutual agreement). He again have to pay Rs.1,000/- as processing fees for availing the ZPF scheme After paying processing fees Mr X has to pay 4 installment in advance only. EMI means Equated Monthly Installment, since you are paying four installments in advance, so in reality it is not 12 EMI it is just Eight EMI that you are availed for. So Rs. 36,000/ 12*4= 12,000/-. Is the amount Mr X needs to pay right now. Hence actual loan that he get on TV is not of Rs 36,000 but only of Rs 24,000/- because 12,000/- he has already paid from his pocket. So how much cost Mr X has paid for availing loan of Rs 24,000?? Ans is Rs 3,000/- (2,000 cash discount that you let it go + 1,000 loan processing fees).

So now if you consider Rs 3,000 as interest cost for availing 8 month EMI loan of Rs 24,000/-, then your annual interest rate will be 18.75% p.a. {( 3,000/24,000*100)*12/8}.

In short friends, there is no ZERO PERCENT FINANCE as such. But the figure of ZERO is so attractive to us that most of we people avoid doing interest calculation. This is both mind as well as mathematics game.

Finally, I would like to conclude my article with one very famous quote “There is no free lunch in this world! If you are availing it for free then there is definitely one who is paying a price for it”

Unfortunately in our case the one who is taking free lunch and the one who is paying price is same person only.


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CA Vap Patel
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