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LOVELY PROFESSIONAL UNIVERSITY

LIM (195)

Term Paper On

Research Methodology

Topic-Truth Behind Zero Percent Consumer Finance

Submitted To: Submitted By:

Mrs. Maneet Kaur Ruhi Gupta (A02)

Rosaleena Priyadarshini (A04)

Sarang Khanwalkar (A06)

Saurav Arora (A09)

Anshul Jain (A11)

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INTRODUCTION

As a child when his first milk tooth fell, he was told to keep the tooth under his pillow at night.
When he wakes up next morning, he was delighted to discover a one rupee coin instead of the
tooth under his pillow. When he asked his parents about it, they told him that a tooth fairy had
switched his tooth for a rupee coin during the night. As a child the story had lots of appeal for
him. Of course as he grew older he realized that there was no "tooth fairy" and that the one-rupee
coin was placed by his parents. The stories doing rounds of zero per cent finance scheme are
perhaps of the same genre.

The old adage that 'there is no such thing as free lunch' aptly describes the zero-percent-interest
schemes. These schemes were widely popular till a few years back. RBI regulations advising
banks to refrain from offering such schemes as well as the general withdrawal of major banks
from consumer durables financing has meant that such schemes have not been in vogue for the
last 2-3 years.

However, there are several NBFCs (Non-Banking Financial Companies) that continue to finance
consumer durables purchase and also have zero per cent schemes. The main attraction of such
schemes is that they influence you to purchase consumer goods that could be more expensive
than your wallet size. The lure of zero per cent interest is an added attraction that makes you feel
that 'YES' I am getting something free and thus I am able to buy a 'bigger and better' product.
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Truth About Zero % Finance

It sounds fantastic and very seductive but the truth is, well there’s no such thing. Admittedly
when we examine the paperwork we will see that the agreement shows that there is no interest on
the loan but in reality we do end up paying that interest in different ways. It stands to reason
really, can any company, no matter how large really afford to loan money for free? The answer
is, of course, no.

One may think that as many motor manufacturers have their own finance companies that they are
able to arrange these zero % deals between themselves. In reality they are completely separate
companies and as such are in the business of making profits. How long they would be in business
if they lent money for free? Of course, not very long! They are not registered charities and are
not set up with the sole aim of helping the dealerships shift units. So, in that case, where does
their profit come from? Who has to stump up for this “hidden” interest? The truth of the matter is
that it comes straight from the dealer .The dealership in this instance will pay the finance
company in a separate transaction. This can be funded by them taking a reduced commission or
they may even make an actual payment. Whatever the means it is the dealer that ends up
covering the cost of the interest on the loan. Actually, we pay for it!

The true cost of providing the “zero % “ finance will have been carefully factored into the other
variables within the dealerships control so although at first glance it looks like a great offer we
will have to pay for it one way or another. The dealer will have either increased the price of the
car that the zero percent deal is attached to, engineered it so that we will be getting less than the
genuine trade price for your part-exchange or will provide absolutely no discount on the new car
(try negotiating the price on a zero % finance car and see how you get on!). In truth the dealer
will probably combine all three of these strategies in order to cover the cost. The dealer will have
a multitude of tricks up their sleeves in order to disguise what is really happening and leave you
thinking that the deal you get from them will be better than anywhere else.

Often you will see adverts guaranteeing at least “x amount” for your old car but don’t be fooled,
you will get the trade price for your car and nothing more. Or you may see “No deposit and
receive £500 cash back!” But as already stated you will end up paying for the cash back.
Anything that is offered “free” will have certainly already been taken into account and factored
into any offer. The bottom line is in order to get the zero % finance deal you actually end up
having to borrow more money than you would if financed the car at a normal rate.

Take two identical cars, in different dealerships. One of these cars is available at “zero percent
finance” and the other car at a standard interest rate. Assuming you negotiated equally as hard at
both dealerships what you would end up paying is the same amount per month whichever car or
finance option you chose.
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Basically a “zero percent finance” deal is a marketing tool used by the dealerships
and manufacturers to give the impression that you, the customer, is going to get a fantastic deal.
The important thing to remember is not to let this offer sway you in favor of one car or dealer
over another. If the car you want is not being offered at zero percent finance don’t compromise
just because a similar car is on offer at zero percent, in reality there’s no difference. One cannot
borrow money free, it just cannot happen.

How do these schemes work?

Unlike their names, most zero per cent schemes have other costs in built. The biggest cost is that
one forfeits the cash discount that he/she would have got otherwise from the retailer. Also one
needs to pay some processing/transaction fees and/or advance EMIs.

So let us see how the costs stack up in a so called "zero per cent scheme"

Example: A LCD color television costs Rs 48000 and is available on "zero per cent" EMI
scheme for 6 months (i.e. There is an EMI of Rs 8,000 per month for 6 months). The consumer
needs to pay a processing fee of Rs 1,000. If the customer had bought the same TV by making a
full payment he could have availed of a cash discount of Rs 2,000, which he is not getting if he
opts for the "zero per cent scheme".

So it works out like this:

Cost of television set: Rs 48,000/-

Amount paid/Cost incurred in advance:
Processing fees Rs 1,000/-
Cash discount foregone

Total Rs 3,000/-
Net finance received Rs 45,000/-

Payment made by 6 installments of Rs. 8,000/- each (aggregating in all to Rs. 48,000/- against
the finance received of Rs. 45,000/-).

The effective interest cost works out to 23% p.a.

However, the popularity of such schemes with consumers particularly in festive season cannot be
denied. Market sources say that despite being costlier in some ways, consumers prefer to go for
these staggered payment schemes and have been highly successful in pushing sales and
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expanding the market for the durables. This is primarily because of the fact that purchasing
through credit cards is very expensive as compared to purchasing through these schemes.

Also, the success of these schemes can be attributed to the availability of credit at the point of
purchase, minimal paper work, small ticket size and hence a not-so-stringent eligibility criteria.

So are there any true zero per cent schemes?

Yes there are.

Some of them are available on the much-maligned credit cards. The credit card allows to convert
specific spends greater than Rs 5,000/- into a 3 months EMI without any cost or fees. This is the
closest that hard nosed bankers come to offering true zero per cent schemes. Some other major
credit card issuing banks also have similar schemes.

Best way to check if a zero per cent scheme is a true zero per cent scheme is to ask the following
questions:

1) Any fees or charges

2) If I pay full amount do I get a discount that I am not getting if I take the zero percent scheme.

If answer to both the questions is "No" then you have a true zero per cent scheme!

So you can 'zero in' on your zero per cent schemes.

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ARTICLE 1:

Take rebate or zero percent car financing?

By Russ Heaps
With sales remaining sluggish, many automakers continue to offer generous car financing deals
such as a rebate or zero percent interest. As a consumer, how do you decide which car financing
incentive will save you more over the life of the loan?
The rebate serving as all or part of a down payment and zero percent financing will reduce the
loan's monthly payments. But while it's true one will usually be better than the other, there's no
hard-and-fast rule which one is best in all situations.
Using someone else's money for free always seems like a smart move. Even if you intend to pay
cash for a vehicle, it makes sense to put your money into some sort of interest-earning
investment while taking advantage of a zero percent manufacturer's offer to pay for your vehicle.
Things become less clear for consumers who must finance, and then have to make the decision:
rebate or zero percent financing? First, understand that not everyone can take advantage of a zero
percent financing offer.
According to GMAC and Ford Motor Credit, neither has a set formula for qualifying an
applicant for a zero percent car financing deal, but a number of conditions must be met to qualify
for zero percent or any reduced-rate financing. Generally, you must:

• Use the captive credit company of the manufacturer (for example, GMAC for GM).
• Have a good credit score.
• Have solid credit history.
• Make a solid down payment of either cash or a high-equity trade-in.

Even if you don't qualify for zero percent financing, all is not necessarily lost. Some incentive
offers include a range of reduced interest rates beginning at zero percent that increase depending
on the length of the loan and the qualifications of the borrower.
To obtain an accurate picture of the savings each incentive represents, the calculator requires:

• Vehicle total purchase price before tax.

• Amount of your down payment.
• Amount of your trade-in allowance (if trading in a vehicle).
• Amount owed on trade (if trading in a vehicle).
• Your state's vehicle sales tax rate.
• Amount of the manufacturer's rebate.
• Current traditional finance percentage rate (available with Bank rate).
• Reduced finance percentage rate if larger than zero.

Determining whether the rebate or the financing deal offers the greatest savings is as simple as
inserting the above information into the calculator's appropriate blanks. It will crunch the
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numbers and display the comparative loan total amounts and the total payment amounts for each,
as well as the difference in savings.

ARTICLE 2:
Are zero percent interest schemes really that?
October 15th, 2009

These schemes do tend to have a big influence if you are someone looking to buy something,
which otherwise would be well beyond your reach! You buy their theory of ‘zero percent
finance’ and pay installments which you strongly believe are interest free! But unfortunately you
end up paying more than what you actually think you are!

There is a popular saying: “There is no such thing as a free lunch!” And Ramesh now fully
endorses it! But not long before he completely disagreed on this thanks to the zero percent
finance schemes offered by some NBFCs (non banking finance companies) with which he had
bought a couple of consumer durables for his home! He blindly believed that the zero percent
finance schemes were in fact zero percent in reality until the time one of his wise friends
enlightened him on how these schemes really work! Well, this is what he found out!

What are they?

Till a few years ago there were many such zero percent finance schemes doing the rounds and
luring the unaware buyers like Ramesh into it! But thanks to the regulations of the Reserve Bank
of India (RBI) many banks have now stopped from offering such schemes for financing
consumer durables. But still there are several NBFCs who continue to offer these so-called zero
percent finance schemes!
These schemes do tend to have a big influence if you are someone looking to buy something,
which otherwise would be well beyond your reach! You buy their theory of ‘zero percent
finance’ and pay installments which you strongly believe are interest free! But unfortunately you
end up paying more than what you actually think you are!

How do these schemes work?

Firstly these zero percent schemes have hidden costs inbuilt in them. Perhaps the biggest loss for
you would be forfeiting the cash discount on a product that you could have otherwise got if you
had bought it on full cash. This apart you will also be paying a transaction or processing fee
under the zero percent scheme and consequently more money through advance EMIs.
For example, you decide to buy an LCD color television that costs around Rs. 48,000. You
decide to buy it using the zero percent finance scheme. Under this arrangement you will pay the
entire cost in six EMIs of Rs. 8,000 for six months. This works out to be Rs. 48,000 spread over
6 months. Now here’s how you end up paying more! To begin with you pay a processing fee of
Rs. 1,000. And since you are buying the LCD on a zero percent finance scheme you are not
entitled to the cash discount of Rs. 2,000!
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So here’s how it looks in the above example. The LCD costs Rs. 48,000! Add up the Rs. 1,000
processing fee that you pay initially and Rs. 2,000 that was lost out on cash discount. A total of
Rs. 3, 000! This means you get a net finance of Rs. 45,000 only! Now you pay an EMI of Rs.
8,000 for 6 months which totals up to Rs. 48,000. So at the end of six months you pay Rs. 3,000
more for what you got.

Are they genuine?

It is an irrefutable fact that the demand for these schemes is highly felt during the festive season.
Market experts believe that there is a marked spurt in sales of consumer durables due to these
zero percent schemes. The consumers wouldn’t mind opting for these schemes as it is a fact that
paying by credit cards is comparatively expensive than purchasing through these schemes. Also,
these schemes have minimal paper work, and some friendly eligibility criteria. However, it takes
some understanding of the basics to find out if they are genuine or not!

How to decide if the scheme is actually zero percent?

It is always better to ask some basic questions to find out if the zero percent schemes are actually
zero percent! Find out if you are eligible for any discount if you pay the full amount and if there
are any transaction charges for the finance scheme and if the answer is no for both the questions
then you might consider yourself lucky that the zero percent schemes is actually zero percent.

Which types of schemes is actual zero percent?

Fortunately there are schemes that are actually zero percent but these are available in a different
form! There are some credit cards where if you spend more than Rs. 5000 with it, it might allow
you to pay the amount in three EMIs without any cost or fees. Unfortunately this is the closest
you could get to a true zero per cent scheme!

ARTICLE 3:

Is Zero Percent Financing A Good Deal?

March 30, 2010

Paying no interest sounds inviting, but not every buyer qualifies

If you've watched much television lately, you've likely seen back-to-back car commercials
touting zero percent financing. As carmakers compete to sell vehicles, nearly all are resorting to
"no cost" financing.

Zero percent financing offers often draw consumers to new car showrooms, but the results aren't
always advantageous for buyers.
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"On the surface, zero percent financing can sound like a no-brainer," said Ethan Ewing, president
of Bills.com, a financial advice Web site. "However, consumers must understand that zero
percent financing is intended to generate foot traffic for dealers as a bait and switch tactic, and
that it is sometimes not as rewarding as alternative incentive offers."

In many cases, zero percent financing can present tremendous opportunities to potential car
buyers. However, consumers should first do their homework to ensure that it is actually the
bargain it is marketed as by dealers and car companies.

Some things to consider:

&#149 Remember that all dealer incentives are designed to generate car sales. The ultimate goal
is to bring consumers into the showroom.

&#149 Zero percent financing is predicated on good credit. Normally, only the best credit
customers will qualify for this promotion. If you are purchasing because of the promotion, check
your credit score ahead of time so you can know whether to even step foot into the showroom.

&#149 Most zero percent financing offers come with a relatively short payback term, which can
make for higher overall payments. For families on a monthly budget, it might make more sense
to avoid the promotion and opt for a longer-term payback so monthly payments are lower.

&#149 Most zero percent financing offers are only available on a limited number and type of
models. Car buyers should research which automobiles are being offered as part of the
promotion before visiting the showroom.

&#149 Be wary of automobile prices that are elevated to compensate for low interest rate offers.
Negotiate the price of the car independently from the loan terms. By packaging your new car
price, any trade-in and your loan terms as one deal, you stand to lose money.

&#149 Finally, explore competing promotions such as cash back offers. Sometimes, the case for
a cash back award might be more compelling in the long run.

For example, the monthly payment on a $28,000 vehicle at zero percent interest over 48 months
is $583.33. This compares to a $572.52 monthly payment for the same vehicle with a $3,500
cash back offer and a six percent interest rate over 48 months (not including tax and title fees).
Do your research carefully and compare all offers.

"Car buyers should arrive at the dealership as well-armed as possible, with an auto in mind, a set
price range, and some idea of your creditworthiness," continued Ewing. "Without this
information you are at a great disadvantage."
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ARTICLE-4

A Zero Percent Balance Transfer Can Reduce Debt

A zero percent balance transfer involves moving money from one card to another in order to
benefit from the non-payment of debt interest. A 2008 Consumer Action survey revealed that,
based on an analysis of 20 different banks, the median rate of interest on unpaid credit card debt
stood at 13.54%. It is immediately clear that this creates an excellent opportunity to reduce debt
for those with a good credit score. Interest free credit cards will only be available to reliable
payers because financial institutions are seeking to cherry-pick the best customers from their
competitors.

How does it Work?

The interest free credit card balance transfer process will commence via a formal request through
the new card provider. There is normally a transfer fee of 3% for moving the money - this will be
added to the overall amount owed. However, it is still possible to reduce debt payments by
upwards of 10% per annum. Once the movement of funds has been completed, the new provider
will write to the customer to notify them. Provided that a good credit score is maintained, a new
transfer can be performed at the conclusion of the introductory period.

Zero Percent Balance Transfer Alternatives

An interest free credit card balance transfer is an excellent way to reduce debt for individuals
with a good credit score. It also provides an incentive to pay more than the bare minimum each
month and avoid using the card until amount owed becomes sustainable. The main alternatives
are a debt consolidation loan or debt relief program, such as a debt management plan or debt
settlement program. However, a debt solution may be more appropriate for those who have an
adverse repayment history or an unsustainably high income-to-debt ratio.
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ARTICLE-5

Is Zero % Finance Schemes as good as they look?

Having remained in a lull for a long time, zero percent finance schemes are back with a bang.
And why not? Everyone -- ranging from consumer durable companies to finance companies to
consumers - needs some push in these difficult times, and zero percent finance schemes are
definitely a ‘win-win’ solution for all. Particularly consumers looking to buy home appliances
and other such goods on easy monthly installments must be a happy lot now. However, before
you go overboard, there is need for some caution.

Says Lokesh Nathany, senior vice president-sales & distribution, Motilal Oswal Asset
Management Co Ltd, “Zero finance schemes look very attractive on the face value.
Psychologically, it appeals to the buyer that he/she is getting goods on equated monthly
installment without paying any interest on the loan amount. During the festive season this tool is
used by various companies to increase sales and a good number of buyers actually go for it.”

This is mostly because consumers, who are unable to afford the purchase of an item through own
resources, find such schemes very attractive and useful as well. They want to stager their
payment, but at the same time do not want to pay any interest for it. No need to say that such
schemes meet their purpose to perfection.

But there is a catch there: While on upfront payments you can avail some or even hefty discounts
in some cases, goods are usually sold on MRP (or on marginal discounts) while opting for any
zero finance scheme. Besides, there is also some processing charge in most cases.

“You should always remember that there is no free lunch in life. Therefore, contrary to the
common perception, all the parties involved benefit out of such schemes. There is nothing like
‘zero’ or ‘free’ in anything you buy. Similarly, zero interest is nothing but higher discounts that
the concerned company or manufacturer offers to the bank or the lender or the financier who in
turn passes it on to the end buyer,” says Nathany.
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ARTICLE-6

Zero-Percent Finance Deals Hit Record High in March

In March, more than 22 percent of financed new cars were purchased with zero-percent finance
deals. Last March the total was just 13 percent. The prior high was 21 percent in July 2006.

Remarkably, 71 percent of new Toyotas financed in March had a zero-percent APR – nearly
twice the previous Toyota record of 39 percent in August 2009.

The two brands with the next highest percentages of such deals were Mazda at 58 percent of all
financed transactions and Mercury at 32 percent.

“Credit must be starting to loosen if almost a quarter of all transactions financed in March were
approved for zero-percent financing,” said Jessica Caldwell, Senior Analyst for Edmunds.com.
“Certainly it seems as if Toyota Motor Credit and other ‘captive’ finance companies may have
lowered standards to help improve sales.”
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ARTICLE-7

Is Zero Percent for Real?

There is something a little strange then about credit card companies coming in with offers to help
you climb out of credit card debt when its they that are the problem in the first place. It’s almost
like a drug pusher pushing a new drug that can get you off drugs but the drug he is pushing is
just as addictive as the last one. But when you get offers for new credit cards each month, they
often are pushing plans to help you get out of debt by going into debt to them

Probably the offer that comes in that is most difficult to overlook are the offers to let you do a
balance transfer of some of your debt and pay no interest on it. These are often called zero
percent offers and they have skilled marketing people write the copy for these offers so you are
prone to believe that you really are going to be able to have a loan paying no interest so you can
just pay off the principle and that’s that.

So are these zero percent credit card balance transfer offers for real? Well they are in the sense
that they might transfer some of the funds and yes, the interest rate you will see on the first
statement will be zero percent. But, like all things, there are catches and things to look out for.
You have to remember that the credit card companies are entirely in the business of collecting
interest. They don’t do anything else. They offer no value to society, build no roads or
hospitals, sell no food or medicine, and make no TV shows to make you laugh. They sit there,
house your debt, collect interest and try to talk you into running up more debt.

So when you get a zero percent offer, they plan on recovering the lost money from the time they
support your debt and you pay no interest. One way they do that is with a transfer fee. They will
almost always charge you a 3-5% balance transfer fee with a minimum and sometimes a
maximum value. Read the fine print carefully to make sure you understand how much this is
going to be and that you agree to it. But be aware that the transfer fee is nothing more than
disguised interest. So calculate that against the interest you would have paid leaving the debt
where it is sitting now before you cash in on a zero percent balance transfer.
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“…Also you will rarely see a zero percent balance transfer that is not for a very limited time
frame, usually no more than three to six months. So with the transfer fee factored in, you have to
wonder if the effort of moving the money was worth it. And at the end of the introductory
period, they are going to raise your interest rate to something that they, the credit card company
want it to be. Be absolutely sure you know what that interest rate is going to be and that they
live up to that stated level of interest. If you enjoy that zero percent transfer for three months and
then face years at 21% interest, you did not win in that transaction, the credit card company
won…” added H. Milla.
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QUESTIONNAIRE

1. Do you believe in Zero percent consumer finance?

a. Yes b. No

2. Is it beneficial than other financing activities?

a. Yes b. No

3. Have you ever purchased anything through Zero percent consumer finance?

a. Yes b. No

4. What was the product you brought through zero percent finance?

5. Should companies go for Zero percent consumer finance?

a. Yes b. No
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CONCLUSION

Only one out of four qualified applicants actually enter into the 0% auto-financing contract.
Other three prefer to scoop up a hefty cash rebate instead. So, you can see that despite the fact
that 70% of all applicants easily qualify for these offers, most of them don’t go in for the deal.
This is probably because of the heavy cash incentives in the marketplace right now.

There is also a catch that most consumers are either unaware of or they just overlook it because
of their excitement for the interest-free financing. The catch is that most sellers usually jack up
the price of the car in an attempt to make up for the lost finance charges. Most consumers are so
thrilled to get a zero percent financing offer that they simply ignore the fact that they are actually
overpaying for their dream car.

However, even if there are so many catches out there, it doesn’t mean that zero-percent financing
is always a bad choice. It is just that you have to be a bit more careful about it.
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References

1. http://www.accessmylibrary.com/coms2/summary_0286-27951072_ITM
2. http://www.bankrate.com/finance/auto/take-rebate-or-zero-percent-car-financing.aspx
3. http://sify.com/finance/all-about-zero-per-cent-finance-schemes-news-loans-
jj0qqzfaifb.html
4. http://www.scribd.com/doc/2210400/The-Truth-About-Zero-Percent-Car-Finacing
5. http://www.whatcar.com/car-advice/glossary/Z
6. http://www.motor-trade-insider.com/index.php/2008/09/the-truth-about-zero-finance/