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What’s the “deal” with 0% interest?

Updated: Aug 4, 2020

We see advertisements for 0% financing everywhere: car dealerships, furniture stores, electronics retailers, big box stores, etc. Generally, this promotion is launched to get people to visit the location. Most people do not qualify for this interest rate, only those with the best credit do. And most places will not tell you what that credit score is, could be 680, could be 800. It would be fair to say the people who qualify for 0% interest are the ones who typically do not need it.

These businesses use the promotion to get people to their location, and most of those people will not qualify. There is more fine print though. Often, especially at car dealerships, that rate is limited to certain vehicles. The dealer relies on customers falling in love with a car even if it doesn’t have 0% interest or even if they don’t qualify and buying the vehicle anyways.

Let’s say you do qualify for the 0% rate and the item you want to buy qualifies for the 0% interest. Should you do it even if you have the cash in the bank? This is the argument most often voiced in favor of taking the deal. I fell prey to this logic when I bought a BMW a few years back. The car was $29,500 and I had that much cash in a high-yield savings account earning 1.25%. The dealership offered me a 0.9% interest rate and I took it. I was basically making 0.35% on BMW’s money, right?

Most people using financing do so because they do not have the cash, therefore spending more money than they have. I would argue that even people who have the cash and choose to finance spend more than they otherwise would. Would I have actually parted with that $29,500 in cash that day? Or would I have bought a more practical, affordable car if financing wasn’t an option? I believe the latter. Furthermore, that 0.35% is not a material amount of money and certainly not worth the chance that I was making a poor purchasing decision just because I didn’t have to part with the cash right then.

There are a couple more things to keep in mind about 0% car loans. One is that the term may be relatively shorter than if you were paying interest and thus the payment will be higher. Another is that sellers must eat this financing cost somewhere, and that comes in the form of higher prices. Often if you choose 0% financing, there is no room to negotiate on the vehicle.

We’ve spent a good bit of time here discussing auto loans. What about financing furniture or electronics? These purchases are a little more straight-forward. The financing companies are hoping for a mistake. Say the deal was “no payments for 24 months” and on month 24 the customer doesn’t have the ability to pay the balance off. When the balance is not paid in the allotted time, the company charges interest (usually a high interest rate) and the interest is retroactive back to the day the account opened.

Another example would be “36 months interest-free financing.” In this case, the customer must make a payment each month for 36 months. If the customer misses a payment, the company will start charging you interest for the rest of the term. In some cases, these agreement can be retroactive as well.

The biggest hidden cost in 0% financing to me is the tendency for people to spend all (or almost all) of their take home pay on payments. They don’t consider the impact of this decision on their monthly budget. People use money they make today to pay for things they bought in the past. If they buy new items, they do so with their future income.

Here’s a hypothetical example. Imagine you take home $3,700 per month, net (about $60,000 per year, which is very close to the median household income in the US). Your living expenses are $1400, your car payment is $400, TV payment is $100, furniture payment is $200, student loan payment is $500, and subscriptions add up to $100. That all adds up to $2,700, leaving you with $1,000 for savings, groceries, entertainment, car maintenance, home maintenance, clothes, etc. So what if you could get a 0% credit card and make payments on something? In this scenario, you couldn’t afford to lower that remaining $1,000. Actually, as we covered earlier, you shouldn’t finance electronics or furniture to begin with.

If you finance most of your big purchases, before you know it your payments will equal what you make, and you will never get ahead. Zero percent financing isn’t a deal at all. It’s a scam for customers to get their future selves to pay for their wants of today.

For my take on whether to lease or finance a car, check out the post, Should I Lease or Finance a Car?

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