Zero Interest Financing

You’ve seen the promotions—buy something now and get 0% financing on your payments, meaning you pay no interest for a set period of time while you make regular payments. There are also no-interest credit cards that promise a 0% interest introductory rate on things you buy with the credit card. Zero-interest financing and zero-interest credit cards sound like a great deal—so what’s the catch?

Zero-interest financing and credit cards could be a good deal as long as you carefully read the fine print to understand all the hidden terms and as long as you can promptly pay off the loan. Otherwise, you get stuck paying much more than you think for zero-interest financing.

Here are some common pitfalls and tips about zero-interest financing offers and credit cards:

Common Pitfalls

  • Not everyone will qualify. A company may advertise a 0% rate in big letters but then say in the fine print that only “qualified” consumers are eligible for that rate. Often, qualifying for zero-interest financing or credit cards may require having an almost flawless credit history.
  • The 0% rate may come with important restrictions. For example, you may be required to make a large down payment to qualify for the 0% rate. Sometimes, the 0% rate is restricted to certain items or models. Some stores may make you sign up for and use that store’s credit card to get the 0% rate. For vehicles, you may be required to pay the sticker price (commonly known as the “MSRP”) and not be allowed to negotiate a lower price to get the 0% rate. The sticker price may be thousands of dollars more than the price you could have gotten if you had been able to negotiate a lower price.
  • The 0% offer may just be an introductory rate, with a very high interest rate kicking in after that introductory period. For example, you could end up paying a 21% rate after just six months of a 0% rate.
  • You may be required to repay the loan over a short period of time, which means that monthly payments may be higher than is affordable for some consumers.
  • If you don’t make your scheduled payments on time, you could lose the 0% interest rate and be charged high fees and back-interest, meaning you have to retroactively pay a high interest rate starting from the date you bought the item.

Tips

If you are thinking about getting zero-percent financing or a zero-interest credit card, here are some tips:

  • Do your homework. Compare total costs and terms of a zero-interest offer to other alternatives. Make sure you’re getting the best possible deal after factoring in all terms—sometimes, an alternative that charges more than 0% interest may be cheaper in the end.
  • Make sure you understand all the terms before you sign or accept anything. What is the interest rate if you don’t make a scheduled payment on time or pay off the balance within the zero-interest time period? What late fees and other fees may you be charged? (Companies often try to make up for a 0% rate by charging high fees.) Read the fine print slowly and carefully, and ask questions if you don’t understand something.
  • If you think you might not be able to make all scheduled payments on time or pay off the balance within the zero-interest time period, consider other alternatives that may charge interest but at a lower rate. Do the calculations to see what will end up being cheaper.
  • Make all scheduled payments on time. For zero-interest credit cards, pay off the full balance each month if possible and if not, pay as much as you can. Remember, penalties and other fees may apply if you don’t pay on time, and depending on the terms you could even lose the 0% interest rate.
  • Don’t buy more than you can really afford. It’s easy to spend money to buy things when you won’t get charged any interest for a few months down the line, but it’s also easy to fall into debt that way. Consider delaying buying items until you’ve saved enough money to cover all—or a significant part of—the purchase price.

For more information on credit card offers and terms, see Credit Card Offers—Common Traps.