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Is 0% Financing as Good as it Seems?

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There’s an old saying that goes something like this, “If it seems too good to be true, it probably is.” And we can’t forget this one: “There’s no such thing as a free lunch.”

Companies want to make it easy and attractive to buy big-ticket items, especially at times of economic uncertainty. A popular technique is to offer 0% financing on purchases of furniture, electronics, and other household items.

While paying for goods and services with 0% interest may sound appealing, there are risks you’ll face that you should be aware of before you take this step.

What’s hiding behind 0% financing?

 

  • Special financing offers make it easier to overspend. Psychology Today reported that credit card use can easily result in overspending, and the same is true for loans. The key is to understand the monthly payments and ensure you can handle them. At the same time, try to assess your purchase decision. Would you buy this item if the 0% offer was not available?
  • Some 0% APR offers come with deferred interest. Hidden in the fine print of some 0% interest offers may lurk deferred interest charges. This means that while you’re enjoying monthly payments with no interest, the interest charge accrues over time. If you miss a payment, have a late payment, or haven’t paid off the loan by the end of the 0% offer period, the accrued interest gets added to your unpaid balance. The key is to precisely understand what happens if you miss a payment or don’t follow the 0% offer exactly as written…before you take the 0% offer.
  • The 0% offer may be impacting the price. Remember, money has value and someone is paying the interest cost of the 0% financing. Usually the merchant is hiding the cost inside the price you are paying for the item.

Before considering a 0% interest financing offer on your next purchase, do this:

 

  • Save up for large ticket purchases. Instead of financing items and committing to another monthly expense, start saving for pricier purchases on a regular basis. Even better, leverage the value of your savings within higher interest savings account options that now exceed 4 percent.
  • Turn on your negotiating switch. Whenever you see a 0% offer, there should be a discount available to you for paying upfront. Someone is paying the interest and it is probably going to be you if the financing cost is built into the price you are paying.
  • Pay on time. Finally, if you do think the 0% option is a deal for you… set up auto payments. Most of these deals are unforgiving and punitive if you miss a payment, so automate them to avoid this possibility.

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