Companies that offer zero-interest loans tout these vehicles as no-lose opportunities for borrowers. A major purchase that might otherwise require a lump-sum payment can be spread out over 12 months to several years, with 0% interest, thereby creating a more palatable cash flow situation. But such loans present pitfalls, including the temptation to make impulse purchases, the tendency to overspend, and exposure to exorbitant penalties for violating a loan's terms.
Key Takeaways
Zero-interest loans, where only the principal balance must be repaid, often lure buyers into impulsively buying cars, appliances, and other luxury goods.
These loans saddle borrowers with rigid monthly payment schedules and lock them into hard deadlines by which the entire balance must be repaid.
Borrows who fail to honor the loan terms are subject to stiff penalties.
These loans are typically only available to prospective buyers with FICO scores of 740 or higher.
Zero-Interest Loan Basics
As its name suggests, a zero-interest loan is one where only the principal balance must be repaid, provided that the borrower honors the rigid deadline by which the entire balance must be satisfied. Failure to comply with the deadline carries hefty penalties. Most notably, the lender may rescind the 0% clause and apply backdated interest to the loan.
A staple at car dealerships and electronics retailers, zero-interest loans are facilitated through third-party lenders, any not by the stores themselves. To qualify for these loans, borrowers generally must exhibit FICO scores of at least 740. In most cases, the zero-interest option tend to be for long-term loans of 72 and up to 84 months.
Car dealerships routinely inundate the local radio airwaves with ads touting zero-interest loan promotions. Prospective buyers should only take the bait if they desperately need a new car, and they are financially positioned to purchase one. Unfortunately, such ads often tempt buyers into making impulsive buys, when it is impractical for them to do so.
It is not surprising that salespeople exploit zero-interest loan promotions to push customers toward more expensive purchases, in a concerted effort to boost their commission income. Some dealers use zero-interest deals as leverage during price negotiations. With such great financing offers, salespeople are often disinclined to come down on purchase price. Buyers should avoid overpaying just because of low-interest deals.
Zero-interest loans promotions may attract buyers who fail to qualify for such programs. In many cases, opportunistic salesmen steer such individuals towards loans that do, in fact, carry interest. After espying a shiny new car or a slick flat-screen TV, many customers agree to such loans, even if the terms are unfavorable.
Zero-Interest Loans and Overspending
Zero-interest loans entice buyers to overspend their hard-earned dollars on fancy new cars and other luxury items. Rather than buying a sensibly-priced used car for $20,000, a buyer may recklessly choose a new vehicle with a $30,000 price tag, reasoning that they would be paying $10,000 in interest anyway, were they not receiving such excellent loan terms.
Zero-Interest Loan Penalties and Fees
Although they may seem like a dream, zero-interest loans can become nightmares for borrowers who don't fully grasp the loan terms. Lenders are quick to cancel zero-interest provisions for customers who fall delinquent on just a single payment. This holds true for revolving debt, such as 0% annual percentage rate (APR) credit cards, and installment debt, such as a car loan. Borrowers who opt for such deals should be mindful of the penalties for paying late or for exceeding the loan's stated terms.
Consumers may elevate their FICO scores by paying their utility and cell phone bills on time, and by keeping their credit card balances low.
What Credit Score Do I Need to Qualify for a Zero-Interest Loan?
Most zero-interest loans are only available to people with a good credit score of 740 or better.
Can I Pay Off a Zero-Interest Loan Early?
Early payoff penalties can be applied to any loan but are not obligatory. Read the fine print of your loan agreement to ensure there are no prepayment penalties before signing anything.
What Happens if I'm Late on My Zero-interest Loan?
Every loan is different, but many zero-interest loans will end the promotional rate in the event of even one late payment. Be sure to read the fine print about delinquent penalties and the conditions of the promotional rate.
The Bottom Line
Avoiding interest is always a good goal, but zero-interest loans can lead buyers to overspend and come with a lot of strings attached. Carefully evaluate your purchase—is this what you intended to buy, and will you realistically pay off the loan within the given time? Proceed with caution.
You usually need a very high credit score to qualify for zero interest loans. Zero interest car loans usually come with a higher price tag, expensive extras and strict repayment terms. If you miss even one payment, you lose your 0% interest rate and get charged late fees.
While you may save on interest with a 0% finance deal, longer loan terms can mean you end up paying more for the car over time. Additionally, consider the impact of potentially higher monthly payments on your budget.
If you have a low-interest loan or 0% financing, there is little to no benefit to an early payoff. The same is true if you're close to the end of the loan. If you don't have an emergency fund, use your extra cash to start one before you pay off your car loan.
Hard to find: Many lenders only offer interest-free loans for specific consumer products, so you may not be able to get a loan for the purchase you're considering.
May have high fees: Some lenders charge high fees on interest-free loans.
Carrying high balances on a 0 percent intro APR card might cause short-term damage to your credit score — but carrying those balances after the introductory APR expires creates a long-term problem. Once your zero-interest period ends, any unpaid balances will begin to accrue interest at the regular interest rate.
Without open accounts, there may not be enough credit activity for credit bureaus to calculate your score, which could harm your credit. Of course, that's not a problem if you don't want to play the credit game and have enough cash to take care of your financial needs.
If you can't afford the loan to begin with, then 0% financing won't help you at all. 0% won't make the car any cheaper, in fact it may do the opposite. Since the dealership only profits from the actual sale, they will rarely agree to bargain down the price and often waive other incentives, like cashback rebates.
In fact, these loans actually accrue interest despite being called 0% interest loans. You just don't have to pay that interest if you pay the installments on time until the debt is paid off. Financial institutions count on the percentage of people who default or miss payments in order to make money from these loans.
Lenders evaluate people based on how they've used credit in the past. An empty credit report with no evidence of a borrowing history signals to lenders that you're inexperienced. That makes lenders nervous and increases the chances they will deny you for credit like a car loan, credit card or mortgage.
The 0% is for a certain time frame, and after than the interest rates jumps. They make money when you don't (or can't) pay off the loan during the 0% period and then must pay interest for the remainder of the loan.
If large payments will put a strain on your wallet or the thought of having less time or cash stresses you out, stick to the term and enjoy the peace of mind of no interest. Additionally, beware of 0% interest loans that do not allow for early repayment, such as those with prepayment penalties.
But what does that mean? No interest financing means you can borrow money from a lender, for free! The money you are borrowing is exactly the amount you'll be paying back. You won't pay any additional fees on that loan.
Since you know interest isn't accruing on your purchases, your transferred debts or both, it's easy to become complacent and pay less each month than you should.
Avoiding interest is always a good goal, but zero-interest loans can lead buyers to overspend and come with a lot of strings attached. Carefully evaluate your purchase—is this what you intended to buy, and will you realistically pay off the loan within the given time?
You have to report the total amount of uncharged interest on your taxes and it will count against your annual and/or lifetime gift exclusions as appropriate. Remember the interest that you do charge counts as taxable income that you must report on your income taxes.
Avoiding interest is always a good goal, but zero-interest loans can lead buyers to overspend and come with a lot of strings attached. Carefully evaluate your purchase—is this what you intended to buy, and will you realistically pay off the loan within the given time?
You'll likely pay more interest over the life of the loan because you're borrowing more money. You may not be able to afford as much home as you could if you put money down. You'll have less equity in your home because you've put down less money. There might be additional fees involved.
Is 0% Financing a Good Idea? Generally, interest-free loans are a good idea if you're confident you can pay off the loan within the promotional period.
Introduction: My name is Greg Kuvalis, I am a witty, spotless, beautiful, charming, delightful, thankful, beautiful person who loves writing and wants to share my knowledge and understanding with you.
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