If you are, or have recently been, in the market for a new car, new furniture, new jewelry, or any major purchase, then you’ve most likely seen stores and creditors offering zero percent financing for a specified term. When you’re low on cash, or you simply don’t want to pay interest, this can be a very tempting deal.
However, tread with caution.
As with any deal that sounds “too good to be true,” you need to read the fine print. In many instances, creditors that offer zero percent financing do so for a specified period of time, and if you don’t pay the balance off in that period of time, then they tack on interest that’s calculated based on the original loan date and amount. That interest can be as high as 28.9%!
For example, I recently worked with a member who purchased some living room furniture from a well-known furniture store. He purchased the furniture at a great deal and paid for it using the zero percent financing the store was offering at the time, with a four-year term. At the end of that four years, he hadn’t paid the balance in full. Shortly after the four-year mark, he received his monthly statement that showed an extra $1300 in interest added on to his balance. When he did some research, he realized he had overlooked the fine print that indicated he needed to pay his balance in full by the end of the zero interest term, or he’d be charged the interest for the entire life of the loan from its origination date. This oversight ended up costing him close to what the purchase price of his furniture was!
I want to be clear that I’m not implying that zero interest financing is a bad thing. In fact, it can be a great deal, as long as you understand the terms and have a plan in place to be sure you pay the loan off within the time period allotted for the zero interest. Do the math, and make sure you’re paying the minimum each month to pay the purchase off in full by the end of the zero interest financing terms. This means you’ll likely pay more than the minimum balance due on your monthly billing statement. If you purchase $3600 worth of furniture with zero percent financing for three years, then you need to be paying $100 per month to get your balance down to zero within 36 months. To stay on track, put monthly reminders on your calendar if you have to.
And if you find you’re nearing the end of the zero financing term and don’t have the money to pay off the balance, consider taking the money out of savings. The interest you’ll be charged on the loan will likely be a lot more than what you’ll receive by keeping your money in a savings account.
Again, it can be a great deal to take advantage of borrowing money for free for your purchases. Just be sure to read the fine print and know what you need to do to pay the balance in full prior to being charged an unreasonable amount of finance charges.