When you first read the ad, does it sound too good to be true? Well then, it probably is! While zero percent Annual Percentage Rate (APR) may seem to be the most attractive feature you’ve seen in some time on credit cards, remember that there always is some fine print! Let’s see what all you need to know when considering such offers.
What is a zero percent APR?
Simply put, a zero percent APR is a rate of interest offered for a promotion, or only a short, introductory span of time and never applicable over the long haul. It may be restricted to individuals with a good credit score. Hence even if you choose to avail of such a card, you should treat these rates with due caution and be sure to check just for how long the offer is valid, as most tend to range from a month to at most a year. Keep in mind that at the end of this period, you would need to repay the debt before the promotional period is over.
If you believe that you are likely to miss a payment (simply because you tend to forget payment due dates, or you may not be solvent) then staying away from these schemes is prudent. Consider a scenario wherein you miss the last payment on your card – it is possible that you will need to pay interest on the entire amount due – even if you have repaid a significant portion of the loan until then.
Mostly, zero percent APR loans are offered for a shorter term than conventional loans such as a personal loan, and hence may have higher monthly payment.
Is it really zero percent?
Where most people falter with this scheme is, they do not factor in the high credit card interest rate that is otherwise applicable, especially in the above scenario. Sometimes, zero percent APR cards can come in with an interest rate of as much as between 24 to 36 percent when calculated over a period of a year. When you translate that into money you owe on the card, it turns out to be a significant amount.
A zero percent APR card then makes sense only when you are able to make timely payments so that there is no likelihood at all of being charged any interest , or make the balance payments in entirety before the promotional term expires.
In addition, card companies may charge the cardholder transaction or processing fees for this offer, which typically range from between 1 to 3 percent of the amount advanced. Remember to factor in this cost when you are considering the offer.
Let us say you are looking to purchase a home appliance that is being offered at Rs. 22,000 on zero percent financing. Shop around, and if the same product is available elsewhere for Rs. 20,000 it is more likely that the zero percent is actually 10 percent!
Does zero percent financing really work?
Well, for the large part zero percent finance has worked, especially when it comes to purchasing white or consumer goods, or even cars. If nothing else it works as a tool to draw in the customer footfalls, and even if a customer does not avail of that particular scheme, it is likely that they may go ahead and purchase the product in any case, possibly with an alternate option.
It is a good idea to avail of zero percent APR if you are looking to consolidate debt, such as if you decide to avail of a balance transfer from one card to another to reduce your existing debt burden.
The Indian scenario
In the year 2013, the Reserve Bank of India (RBI) came down heavily on zero percent APR schemes, in light of such offers luring vulnerable customers. As per the RBI, fair practice demands that the processing fees and interest rate charged should be uniform product or segment-wise, irrespective of the sourcing channel, in order to offer an actual fair deal to customers.
Coming from that school of thought, the RBI completely banned such schemes in a bid to protect consumers and also mandated that no additional charges may be levied on purchases made on a debit card. As per the central bank, some financial institutions were factoring in sourcing expenses into the interest rate, which is not in favour of the customer. Hence, the only factor that would justify differential rates for the same product would be if the lender were to take a decision based on the risk profile of the customer, but which may not the case when it comes to white goods for example, where the interest rate is normally flat irrespective of the customer profile. That said, a credit score is taken into consideration when a lender takes the decision to sanction most loan types.
Given this background, the RBI notification also mandated that if for a particular product a moratorium period is available, the benefit needs to be passed on to the customer by ensuring that the repayment schedule commences only after the said period expires. This cannot then be adjusted against the interest.
The bottom line
With these checks and balances in place the scheme has become more streamlined in India. However, as with all offers of credit do make sure that you read the fine print before signing on the bottom line.
Having a good credit score always helps, and you need to remain credit healthy is order to be avail of the best deal possible, especially with regards to the rate of interest be it a loan or credit card.
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