Timed with the festive season, various consumer loans and offers are being thrown at you. Are they worth it? Do you really need them?

Moneylife Digital Team

Festive season is the time when you would not think twice before loosening your wallet, especially on electronics and other consumer goods. And those special discounts, offers and loans at 0% interest rate attract you all the more. Should you fall for these ‘benefits’ or should you not. Banks are offering consumer loans with varying EMI (equated monthly instalments) options over various time periods, 0% interest loans and 0% processing fees payment options.

Consumer loans

The loans that you get for purchasing these goods are regular personal loans; the only difference being that these loans are directly credited into the sellers’ account instead of handing over the sum to you for making purchases of your choice. This means that the end use of funds is tracked and the financing institution has all the right to come to your home at any time to inspect the condition of goods purchased under loans. The duty of protection and insurance of the goods purchased lies solely on you. In case you do not pay back the loan or destroy the product, the company has full rights to go legal against you.

The majority of finance companies provide loans for products sold by companies under the same umbrella brand. You should check the brand and retailer tie-up before deciding where to take loan from. Also, it is good to shop around for comparison of types of loans offered to you by different finance companies. You could land up with the best deal in market.

The 0% interest rate myth

That’s one attraction no one can resist. Instalments, and that too, without interest? What could be better? But, remember that companies are around to do business. You cannot have the cake and eat it too. Although there is no interest attached to the EMIs per se, finance companies charge you processing fees which is, either fixed or a percentage of the loan amount. For example, Bajaj Finserv Lending offers its 0% Interest Consumer Durables Finance at the following terms:

Now, if you take a loan of Rs15,000 with 0% interest and a processing fee of Rs600 is levied on it, the total cost for you becomes 15,600, which is 4%, one time. You should take these costs into consideration to find out whether it is better to take a personal loan or else go in for 0% interest rate EMI option. Compare this with the offers that online retailers give you.

Online Retailers—Another twist

Online retailers offer easy EMI options on purchase through credit cards round the year through tie-ups with banks. These are either ‘interest’ or ‘processing fee’ free. Some have 0% processing fee if you opt for three-month EMI and a processing fee is levied for a higher tenure. When going for such options calculate the total cost of funds and then take a decision.

For example, if a television costs Rs15,000, and the interest cost at three-month EMI is 0%, you pay Rs5,000 each month for three months. And if the EMI is Rs2,700 for six months’ payment period the total cost come to Rs16,200, which converts to the cost of loan at 8% for six months. This option is cheaper than the 0% interest EMI option. You can look at buying online through these retailers in the festive season too, to find any good offers that would bring the cost down even further.

Final Take

Make a comparison of the total costs of loans on each platform and then take decision. The good part about online retailing is that they deliver goods at your doorstep and save you of all the hassles and cost of transportation. You should, however, be careful of your credit limit and regularity of payment; else you could land up with borrowing costs that are even higher than regular personal loans due to penalty levied for late payment.