Festive discount schemes are no free lunches

Go for cash discounts if you can make lump sum payment.

Tempting pre-Diwali offers have been luring customers into shopping, in spite of high rate of inflation and slowdown fears. The offers range from direct cash discounts on products to zero-interest equated monthly instalments (EMI). These have certainly managed to increase footfalls, but customers need to compare the offers before loosening their purse strings.

ZERO-INTEREST OPTION:
Most electronics and consumer durables stores have tie-ups with non-banking finance companies and provide a zero-interest option to customers. So, customers are expected to make a down payment equalling four months of EMI. The rest is then paid over the next eight months as EMIs. So, suppose you want to buy a 240-litre two-door Electrolux refrigerator, which originally costs Rs 17,990, but is being offered at Rs 14,000 after the festive discount of Rs 4,000. You would be required to make a down payment of Rs 5,000. You are asked to pay Rs 1,250 as EMI for the next eight months. That works out to Rs 10,000. And, the down payment, which is four months of EMIs, comes to Rs 5,000.

Vijay Sales Managing Partner Nilesh Gupta says: "Sales always rise during the festive season and almost 15-20 per cent of our sales is a result of zero-interest schemes."

But, even as these schemes are a hit with customers, not all such schemes work in favour of the customer. Most of these have hidden costs attached. So, in the case mentioned above, you end up paying Rs 15,000 — Rs 10,000 as EMIs over eight months and Rs 5,000 as down payment. Since the original cost, to begin with, was Rs 14,000, you end up paying Rs 1,000 more, which is supposed to be a one-time processing fee and varies according to brands and products.

Typically, in a zero-interest offer, the total EMI amount for the loan tenure, plus the down payment, should work out to the original cost of the product. So, in the above case, the EMI should ideally be Rs 1,166 per month for it to be a zero-interest offer.

Consumer durables shops do offer fully zero-interest schemes on certain brands and products, with no added costs of processing fees and interest, but the offers are usually on products that are outdated or don't have any resale value.

Arvind Rao, certified financial planner, says: "These schemes are structured in a way that the processing fees and the advance EMI, taken as down payment, make up for the interest that they would have otherwise charged."

Shopkeepers don't generally allow you to extend the EMI tenure, but even when they do, they may attach conditions like asking for the payments to be made through credit cards. This helps them earn merchant commission of 2 per cent from credit card companies.

CASH DISCOUNTS:
What you could forfeit by opting for zero-interest schemes would be the discounts available on upfront payments. So, if you want to buy the Electrolux refrigerator that originally costs Rs 17,990 and is priced at Rs 14,000 after the festive discount of Rs 4,000, the EMI option is also available at the same price, of Rs 14,000. Still, by opting for full payment in one go, you save Rs 1,000 that you would have paid as processing fee. A small amount, but a saving, nonetheless.

"We are already offering a discounted rate on several brands, but the range of discount varies from five per cent to eight per cent," Vijay Sales' Gupta adds. However, some shopkeepers say they may be willing to negotiate a further discount in case of cash payments.

"Those who can afford to pay the entire amount in one go should prefer that option," says Rao.

But, paying in EMIs allows you to buy an expensive product, even as you spread the payment over 12 months.