A finance professional last week told me he had a great tip for MoneySmarts. He said the 0% interest rate promotions are a sham. Yep — a clever cover up, a daring deception, a trap for the millions of unsuspecting shoppers in this great big mall of a country.
Unfortunately, he declined to be identified, but he was willing to explain all the details. So MoneySmarts went money myth busting to find out if his claims were for real.
Hot glue gun stuck to the end of my nose! I was surprised how easy it is to make money in this country. Here is what I found.
If you are like me, you go shopping at least once a week. Or at least go window shopping. You find that as you browse the shop windows, your eyes constantly stray to digital cameras (the hot craze right now), laptops (I especially like the razor-thin ones because I’m hardly 5 feet tall and lugging around more than two kilos of computer equipment is not my idea of a good day), plasma television and aircondition units because of this terrible summer heat.
These are by no means cheap items. But hey! There’s a 0% interest installment promo and all my three credit cards are accepted!
Now, here’s the deal. Swiping a credit card removes the pain of having to fork over a huge amount of money and it is very convenient. But we have been told hundreds of times not to use the credit card just to look good because the interest will kill us. Well this time, there’s no interest to pay. So why not jump at the chance, right? Sounds like a great deal.
Wrong.
The Canon 400D camera cost P48,500. Its interest free if you pay for 12 months. The monthly payment is P4,042. Cut down to monthly bite-sized pieces, it doesn’t look too painful. Then I asked the clerk, “What if I don’t want to pay by credit card? I want to pay in cash.”
“Mam, its P44,950 if you want to pay in cash,” she says.
Technically, there’s no violation of Administrative Order 10 issued by the Department of Trade and Industry, which put a stop to the practice of putting a card price and cash price in one price tag. But if you pester the clerk in a nice manner, he will tell you that he can give you a discount if you will pay in cash.
So, is the 0% interest for real? MoneySmarts concludes the nice round “oh” is just a figure, often in red, to catch people’s attention. The interest has been included in the price already. If I pay P4,042 a month for that Canon 400D, I will be paying 12% interest on this installment promo and not 0%. If I pay in cash, I would save P3,550 – that’s almost 2 gigabytes of additional memory for the camera.
If your aircondition unit at home is up for replacement, then go for the deal because the 12% interest is much less than the regular 42%. But don’t let the deciding factor be the attractive “0%” deal, because it ain’t what most people think it is.
50 Responses to “The truth behind 0% interest promos”
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May 17th, 2007 at 1:47 pm
hi flexy, some pretty good insights you got there. I totally agree. Unfortunately, the DTI is bound to the DAO unless someone or a group of people formally make a complaint. I hope people take the time to do that.
May 17th, 2007 at 1:45 pm
hi omski, pinoy investor is right. Add-on interest rates are not as low as they seem. This type of interest is computed on the total amount you owe and does not go down even if you are paying down the debt and even if you pay early. Credit card companies have their own computations.
Overall, add-on rates are still lower than the usual 42% per annum BUT are not much lower than that. Click here to see an example of computation from HSBC:
http://www.hsbc.com.ph/ph/btnu/btnu.htm
May 17th, 2007 at 1:26 pm
hi omski, if I may (I’ve been asked this before as well =)…
add-on interest is interest applied to the begining/principal of a loan (or any series of payments) then divided by the number of period.
Example, I lent you P120, then I ask for an add-on interest of 10% p.a. That means that you should pay me P12 in interest after 1 year. So if we compute for the amortization (using equal installments every month). On the principal, you should pay me P10 (P120/12months) every month and P1 in interest (P12/12 months). That’s an amortization of P11 every month (P10 prinicipal + P1 interest).
It may seem logical but an equitable computation should be a “diminishing principal” approach. Meaning, the interest on the second month’s payment should have been lower (not P120) becuase you already returned a portion of the loan. Following the simple example, the balance of the loan is now only P110 instead of P120. In effect, your interest should be lower.
I hope this helps. = )
May 17th, 2007 at 9:02 am
Salve, Pinoy Investor,
Can you explain more about add-on interest? I see this word a lot but don’t exactly know how it works or what it is…thanks in advance.
May 16th, 2007 at 6:56 pm
just an additional insight…assuming that DTI will impose in the future that shops cannot offer a special cash price…what would happen is that they will just impute the surcharge to the SRP (I don’t think that shops will abosrb the surcharge and cut their profit. They need to make money too)…effectively, this would increase the prices.
.
Therefore:
1. For card users, I guess this is okay since this is the price that they would have paid in the first place with or without DAO 10.
2. But for people without credit cards (no choice but to pay in cash), they are paying the credit card surcharge without benefiting from it. so the law just created “instant inflation” for them.
The way I see it, DAO 10 intends to protect the interest of the consumer but is actually protecting the credit card companies.
Note: I have nothing against credit card companies. Just think that there needs to be free-flowing information so that users understand their options