What Zero Percent Financing Really Means

We’ve all seen the ads – 0% interest and zero payments for an entire year! It all sounds so good. You get to buy and have something right now and not have to make a single payment for many, many months. If you have been considering such an offer, hopefully, you have also read the fine print that explains all of the details.

Here is some tips and advice on what to look out for when looking at zero percent financing offers:

Many offers such as this are a good deal if you know you will be able to pay all of the debt off before the year or promotional period is over. Such offers can be found even on automobiles, where if you put a large enough down payment on the car, you can finance it free of charge for three or even five years in some cases.

Missing Payments – Beware!
Just what happens, though if you don’t get that last payment in before the end of the promotional period? The deal is that you then often must pay interest on the entire loan amount. This is true even if you have paid down a significant portion of the loan.

For example, let’s say you purchase new carpeting for your home with a zero percent interest and zero payments for a year offer. The total of the carpet was $5000. If you were to spread out the payments evenly you then would be paying about $417 a month for the next 12 months. Is that something you can afford? If not, you could be strapped with accrued interest for the entire year on the full balance, even if you had paid back $4,999 of it!

High Interest Rates
The interest rates on these kinds of offers are also usually the highest rates around – sometimes as much as 24-29%. You would have been better off using a credit card and paying 10-12% for the year.

Ideally, when you take advantage of these offers it is best to have the money already sitting there in your own bank account earning interest for you. Then on the 11th month, you pay the full balance and avoid any finance charges at all.

Make Monthly Payments in Full
If don’t already have the money saved for such a purpose it is best to make the monthly payments that will total the full sale price. Most statements from the lender will have a column labeled “accrued interest.” You will see the amount go up each month that you haven’t paid the full balance. This is the amount you will have to pay the lender in addition to the initial loan at the end of the promotional period.

Then, when the 1st year is up and if the balance is not paid, you will be accruing interest each month (actually at a daily periodic rate) until it is paid in full. There will even be interest on the accrued interest. In a sense, you would be paying even more interest by deferring payments for the first year.

The lesson here is to never buy anything on these deals unless you afford the monthly payments equal to the total cost or are prepared to pay the balance in full before the end of the promotion.

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