During festivals, good deals are often offered for gadgets. And, if one is short on cash, dealers are quick to point to 'zero-interest' equated monthly instalment (EMI) options.
The numbers look favourable. A home theatre priced at Rs 15,890 may be bought for a down payment of Rs 5,896. This would be followed by eight instalments of only Rs 1,325. The final payment works out to Rs 16,476. So, for a small difference of Rs 586, you could buy the product you've wanted for long.
For products such as 3D LED TVs, splashing out about Rs 1 lakh at one go can be a quite a drain on finances even seem wasteful. The EMI route would turn this into an outflow that is manageable. However, for smaller products like music systems, iPods and now, even phones, do EMIs really make sense?
What works in favour of such schemes is the fact that these are hassle-free. If one pays through a credit card, it is an instant transaction, since a card provides proof of residence and identity. The reason: If you are a credit card holder, you are already credit-worthy.
But ask a financial expert and he would always say no to such schemes. Sumeet Vaid, chief executive of Ffreedom Financial Planners, says, "It's better to plan intelligently for these expenses. There is always a festive season in India. So, plan well in advance, and you can avail of a discount by paying a lump sum. Also, it's best to compare the prices at two to three places before taking a decision. One needs to consider hidden costs, if any, such as a processing fee. This is generally applicable for EMIs through credit cards. One also needs to look at the cash flows and whether EMIs would pinch in the next 10 months or a year. Postponing the buy and saving for a gadget kitty might be a wise move."
Arvind Rao, a certified financial planner, says though zero-interest schemes could be genuine gains for customers, they would lose any cash discount they would have got had they made a full payment.
As a buyer, don't be swayed by zero-interest schemes. This is because you should consider the cost of borrowing. If you are losing Rs 5,000-10,000 as cash discount on a product that costs Rs 50,000, it is a heavy loss. Add to that administrative and processing costs and suddenly, you could be paying 10-15 per cent, the cost of a personal loan, for buying a product.
That is one part of the story. Through these schemes, many people keep adding to their monthly outgo because they feel these small loans would last for only about a year and would be easy to manage. So, there are people servicing a home loan, a car loan, a personal loan, a television loan, etc. All these EMIs could account for 50-60 per cent of the salary. Ideally, you shouldn't pay more than 40 per cent of the salary towards EMIs. So, club all EMIs before taking a call to go for another one. "Decide on the quantum of the EMI before you make the purchase," says Rao.