0% financing or zero percent financing, alternatively known as

discounted Discounting is a financial mechanism in which a debtor obtains the right to delay payments to a creditor, for a defined period of time, in exchange for a charge or fee.See "Time Value", "Discount", "Discount Yield", "Compound Interest", "Efficient ...

finance, is a widely used marketing tactic for attracting buyers of

consumer goods A final good or consumer good is a final product ready for sale that is used by the consumer to satisfy current wants or needs, unlike a intermediate good, which is used to produce other goods. A microwave oven or a bicycle is a final good, b ...

automobile A car or automobile is a motor vehicle with wheels. Most definitions of ''cars'' say that they run primarily on roads, seat one to eight people, have four wheels, and mainly transport people instead of goods. The year 1886 is regarded ...

real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...

, or

credit cards A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the ...

in different parts of the world.

Definition

For the buyer, the scheme is offered as a steal, without any levied

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...

for a specific period, subject to special terms or conditions.

Mathematics behind 0% finance

The financial mathematics behind the 0% finance scheme is somewhat complex, as the calculation differs with respect to the type of product and the

country A country is a distinct part of the world, such as a state, nation, or other political entity. It may be a sovereign state or make up one part of a larger state. For example, the country of Japan is an independent, sovereign state, whi ...

. These deals are offered by finance companies or

bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

s in conjunction with a

manufacturer Manufacturing is the creation or production of goods with the help of equipment, labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary sector of the economy. The term may refer to ...

or dealer network. The schemes offer "zero percent" finance, where a customer pays for the financing cost in an indirect manner. The indirect cost will include paying a processing fee, a significant amount as advance EMIs ( equated monthly installments), as well as a minimum cash

down payment Down payment (also called a deposit in British English), is an initial up-front partial payment for the purchase of expensive items/services such as a car or a house. It is usually paid in cash or equivalent at the time of finalizing the transactio ...

. Often, the biggest cost may involve forfeiting a cash discount which might otherwise be available on a cash purchase. Suppose a customer opted for 0% finance to buy an electronic device worth $1000, offered on a term of 6 months' EMIs, with a $50 application processing fee and one month's EMI in advance. This sale actually results in a 12.48% effective interest rate for the customer. Several central banks have reacted strongly to zero percent or discounted

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...

schemes and want them stopped, as they feel consumers are misguided by such schemes into believing that bank funding comes for free. As such, schemes serve the purpose of attracting and exploiting vulnerable customers. Many agreements charge interest on the full price- backdated to the original purchase date- if the remaining debt is not cleared before the end of the free credit period. It has been suggested that credit providers make payment arrangements intentionally more difficult and exploit consumers' expectation that they will be sufficiently reminded (either by not reminding them or by presenting the reminder in an inconspicuous manner) in order to invoke this clause and generate income. Moreover, it has also been noted that with higher-value purchases such as car deals, the costs for the 0%-financing are compensated by going up with the price of the item.

References

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