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Zero Interest Financing

A zero-percent loan could be a great deal as long as you are careful to read the fine print and promptly pay off the loan. Otherwise, you could be inviting financial trouble.

Here are some common pitfalls associated with zero-interest loans:

  • The “0%” offer could come with a very high interest rate that kicks-in after the grace period. For instance, you could end up paying a loan interest of 21 percent after only six months at zero-percent interest.
  • You could lose the zero-percent rate and be charged a penalty of back interest on the amount borrowed if you fail to make your scheduled payments when due.
  • You may be required to make a large down payment to qualify.
  • You may be required to repay the loan in a shorter period, such as 24 months.
  • For vehicles, you may be required to pay the sticker price ("MSRP") for your new car, rather than be able to negotiate a lower price.

Another variation is “0%” financing offers. You’ve seen the promotions – buy now and get zero-percent financing so you can fill your living room immediately with furniture.  Or, take home that special birthday present of fine jewelry with zero-percent financing. Being able to get zero-percent financing means you would pay no interest for the entire term you are paying for the item you bought. So what’s the catch?

Not all consumers will be able to take advantage of the special zero-percent offer. For many consumers, qualifying for zero-percent financing requires having impeccable credit and sometimes even for those who do qualify, the offer is restricted to a particular model, brand or style and with limited terms.

Zero-percent financing generally applies to short-term financing which results in increasing the monthly payment so that the payment becomes unaffordable for some buyers.

If you are thinking about zero-percent financing or have a contract with zero-percent financing, here are some things to think about:

  • Do some homework. Compare prices and quality of the merchandise. Make sure you are getting the best possible price.
  • Read the fine print. At some stores, zero interest may apply to certain products but not others – and for different periods. Merchants sometime require that the purchases to be placed on  the merchant’s credit card or that the buyer sign a financing agreement that could make you liable for finance charges back to the beginning of the contract if you fail to pay off the purchase in full by the end of the 0% time period. Be sure to read the sales agreement and make sure you understand and agree with all items before you sign.
  • Confirm what the interest rate will be if you fail to pay off the balance in the allotted time
  • Find out what kind of late fees the company charges.
  • If you don't think you will be able to pay off the balance before the higher rates begin, consider other financing options that may charge interest sooner, but at a lower interest rate.

Consider delaying the purchase of items not necessary until you have saved enough money to cover all or a significant part of the purchase price.

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