Stores often entice customers to make big purchases with zero-interest loans. Credit cards tout that they’re zero-interest. There are even zero-interest car loans and zero-interest student loans, although the latter is rare. What’s not to like?
Actually, for the most part, nothing. Zero-interest loans are often as great as they sound. But anything awesome can still turn out to be awful. That may be a sad worldview, but an adorable puppy can still bite you. Flowers can give you allergies. It’s possible to die from laughter. And, yes, a zero-interest loan can sometimes end up costing you more money than you would ever imagine.
That doesn’t mean you shouldn’t jump at the chance to get one. But you should be aware of several things.
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There’s a time limit on that loan. Unless they aren’t paying attention, customers are aware of that going in. As a general rule, stores are very upfront that a consumer needs to pay off a sofa in 12 or 24 months — or however long the zero-interest period is; or a zero-interest credit card will make it a cornerstone of its advertising campaign that the card has zero interest for 18 months.
And while other people might mess things up and not pay off the loan in the time period, you won’t do that.
At least, that’s what you’ll tell yourself when you apply for a zero-interest loan, and maybe you’re right. Just make sure you aren’t in denial. If you make a healthy salary, and you never or only very rarely have issues with making late payments, then you’re probably perfectly safe taking out a zero-interest loan. If you’re constantly juggling bills and often make late payments, and you want this zero-interest loan to make your purchase and give you some relief, then are you really sure you won’t still be juggling bills and making late payments when this zero-interest time period is over?
The reason that’s so important to consider is …
Missing a payment or paying late may mean you do pay interest. Some zero-interest loans have deferred interest. That is, if you don’t pay off the full amount within the time period you’ve been granted, you could be saddled with all of the interest associated with your loan. For instance, you could buy $3,000 worth of furniture with a zero-interest loan and be diligently making payments to the point where you’ve paid $2,500 off. But then you have a bad month or two, and you don’t end up paying that last $500 before the time period is up. In that case, you may have to pay interest on the entire $3,000 loan — plus the remaining $500.
“Zero-interest loans can quickly become a traumatic experience when a borrower does not read the loan terms and conditions with a full understanding,” says J. Keith Baker, a certified financial planner who teaches personal finance classes at North Lake College in Irving, Texas.
You need to be especially careful with credit cards. If you get a zero-interest credit card for 12 months, you don’t want to miss a payment. Of course, you probably already realize that. If you’re approved for a zero-interest credit card, you probably have stellar credit and are keenly aware of the importance of timely payments.
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Still, it won’t be pretty if you do miss one.
“When that happens, the interest rate immediately goes up … along with late payment fees possibly added on to the balance due,” Baker says.
As for that interest rate, Baker says that it’ll likely go up to somewhere around 24 percent APR. That’s quite a jump from 0 percent APR.
There could be fees associated with the zero-interest loan. If you’re transferring money to a zero-interest credit card, for instance, Baker points out that you may have a 2 or 3 percent balance transfer fee that you’ll pay. It still may be worth transferring the money, but fees can negate part of the appeal and value of having a zero-interest credit card. So read that fine print.
In fact, sometimes fees end up costing as much as the interest you’re trying to avoid, according to Kaitlin Walsh-Epstein, a New York City-based marketing director for student loans at LaurelRoad.com, which offers student loan refinancing, personal loans and mortgages.
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The zero interest is designed to get you to open up your wallet. In other words, just because you want the zero-interest loan, that doesn’t mean you’ll get it. Zero-interest credit cards, as noted, are generally offered to consumers with credit scores well into the 700s. (Zero-interest store credit cards may not be as picky with a consumer’s credit card, but the time period that you’ll get zero interest is likely to be short, making it even more critical to be careful that you don’t overspend.) Car dealerships will sometimes offer zero-interest loans, to attract customers onto their showroom floors, but like the credit card, if you go in to buy a vehicle and have a 650 credit score, you may end up buying a car but almost certainly not one with a zero-interest loan. That’s something to remember if you have decent but not spectacular credit, and you find yourself getting excited about making a purchase. You may be about to buy something with a far higher interest rate than zero.
Don’t take out a zero-interest loan under pressure. “If you are taking out one of these loans, take the time to understand what you are getting into,” Walsh-Epstein advises.
If you’re pondering one of these loans at a store or somewhere with a salesperson, Walsh-Epstein suggests leaving for a while, so you can think about the math with a clear mind and won’t feel pushed into a decision.
Of course, that’s good advice involving any loan, but it seems especially smart with one touting zero interest. By the end of the loan, as far as the interest goes, the goal is to have spent zero, not to feel like a total zero.
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5 Things to Consider Before Taking Out a Zero-Interest Loan originally appeared on usnews.com
