Is Zero-Percent Financing Too Good To Be True? (2024)

FAQs

Is Zero-Percent Financing Too Good To Be True? ›

If a certain situation seems too good to be true, you can bet that it probably is. In the case of 0% financing, the situation may be too pretty on paper to offer any real value. If you believe that financing a 0% loan through an auto dealer will provide you with the best value, you might want to think again.

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?

For years, you've heard the advertisem*nts for zero percent financing on your favorite new vehicles. 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.

Key takeaways

A 0 percent intro annual percentage rate (APR) card can help you consolidate and pay down debt faster – without interest payments – if you're disciplined in how you use it. These cards typically come with a balance transfer fee, and you risk losing the 0 percent intro APR if you're late with a payment.

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.

A 0% APR is not good for your credit if you overspend, as high credit utilization and missed payments hurt your credit score. If you end up carrying a balance from month to month after the 0% period ends, you will also owe expensive interest charges, making it hard to pay your bills on time and build credit.

You must be careful to avoid getting wrapped up in the thrill of 0% deals. Although the interest costs are listed as zero, the true numbers are built into the price of the loan. Unless you're aware of this before signing on the dotted line, you may be signing into a less than stellar deal.

While 0% APR financing seems like a great deal, it's not always the best option when you consider your budget and overall financial situation. You'd prefer a used car: With a 0% APR deal, you'll likely have to purchase a new car, which may cost more than you can afford.

Depending on your circ*mstance, the deal may not truly save you money. There are also a few situations where special financing isn't as good as it seems, and qualifying often requires excellent credit. Check current auto loan rates and ensure interest-free won't cost you more overall.

An automaker makes money with a 0% deal in one simple way: It doesn't make money on financing but rather on the car itself. Dealers will try to sell you extras to make up the difference, including extended warranties for your vehicle. Also, the cost of financing gets built into the price of the car.

What is the problem with 0 interest rates? ›

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.

Therefore, zero inflation would involve large real costs to the American economy. The reason that zero inflation creates such large costs to the economy is that firms are reluctant to cut wages. In both good times and bad, some firms and industries do better than others.

The rates went back to near-zero levels again after the Global Financial Crisis. “The saga of ultra-low interest rates in Japan reflects the fact that the Japanese economy suffered from secular stagnation and also from mild but persistent deflation for the past 20 years.

You'll typically need good or excellent credit (a score of at least 690 on the FICO scale) to qualify for most 0% APR credit cards. The ongoing interest rate, which is charged once a card's promotional period ends, will also depend on your creditworthiness.

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.

Banks offer 0% APR credit cards to attract new customers and encourage spending. Although these cards have an introductory period during which no interest is charged, if people carry a balance after that, the bank will earn money. This happens in most cases.

An interest-free loan might carry added charges such as processing fees, late payment fees, pre-payment penalties, and so on. It is crucial to carefully read the loan agreement and terms to understand all potential costs involved and clarify with the lender upfront to avoid any hidden charges.

Costs of an interest-free deal

If you still have money owing after the interest-free period ends, you'll be charged interest. Interest rates can be as high as 26%. Retailers also charge fees on interest-free deals, which may be added to the amount borrowed.

Interest free credit offers your customers the opportunity to spread the cost of their purchase over a fixed time and with equal monthly payments, but without having to pay extra. Great for customers making larger purchases who can budget for a monthly expense without having to pay all up-front.