0% financing (zero percent), alternatively known as discounted finance, is a widely used marketing tactic for attracting buyers of consumer goods, automobiles, real estate, or credit cards in different parts of the world.
For the buyer, the scheme is offered as a steal, without any levied interest 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. These deals are offered by finance companies or banks in conjunction with a manufacturer 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. 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 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. 
- ^“The story behind zero per cent interest EMI schemes”. The Economic Times. Retrieved 16 December 2014.
- ^“The truth about 0% Financing”. Building Wealth. Archived from the original on 2015-01-02. Retrieved 16 December 2014.
- ^“There’s more to 0% finance schemes than meets the eye!”. The Economic Times. Retrieved 16 December 2014.
- ^“5 reasons you should stay away from 0% schemes”. NDTV. Retrieved 16 December 2014.
- ^ Jump up to:ab Jenny Knight (2001-01-17). “Interest-free credit can cost a fortune”. Telegraph Media Group. Archived from the original on 2018-01-04. Retrieved 2018-09-04. a woman ended up with a bill for an extra £2,500 because her cheque did not clear in time [..and another..] was hit with an additional interest bill for £810 [when] she was a little late in paying the final instalment. [..] shoppers believe that interest-free credit is just what it says it is [..] The scam works by relying on shoppers expecting [a reminder] before the free credit period ends. If customers do not clear the full debt before this date, they are charged interest on the full price, backdated to the day the goods were bought. Sometimes either no reminder is sent or the warning is hidden [..] The sceptical view [is] if I miss the deadline, I will generate more income
- ^Andrews, James (2017-04-18). “The truth about 0% car finance – how it works and how good the deals really are”. mirror. Retrieved 2018-11-02.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder TBIL.co STATX Fund.