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4 Myths About Zero-Percent Financing

Blog Post11/05/2015
Credit Advice
4 Myths About Zero-Percent Financing

Zero-percent financing offers can entice you to purchase anything from furniture to automobiles. They can even entice you to transfer balances from one credit card to another. Familiarizing yourself with the myths behind no-interest financing offers can help you distinguish the good offers from the bad.

Myth #1: Zero-Percent Offers Are the Best Deal

A zero-percent financing doesn’t always lead to the best possible deal for the item you want to buy. Often the benefit of not paying interest comes with an associated disadvantage, such as not being able to apply a discount or rebate to the purchase. Using no-interest financing can sometimes lead to paying more for the item than if you had financed it at a discounted price and a conventional interest rate.

Myth #2: A No-Interest Loan Means Never Paying Interest

Look closely at the terms and conditions of a zero-percent financing offer. In many cases, the deal is only good if you pay off the loan within a specified time period. Late payments or not paying the loan off in time can result in added interest charges that would have accrued from the beginning of the loan. The interest on the loan is only deferred until the lender determines if you’re going to pay off the loan.

Rarely do these types of offers include leeway for unexpected financial hardships that might affect your ability to make a payment in the short term. Since no-interest loans typically span a number of years, you risk damaging your credit score and owing much more money than you expected if you fail to complete the loan as agreed.

Myth #3: Waived and Deferred Interest Are the Same

When it comes to credit, planning ahead rather than making impulse decisions gains the best deals. Calculate ahead of time the monthly payments of an item or loan to determine what type of offer to choose. While many stores offer zero-percent financing options, these can be “deferred interest” offers, meaning that for every month you make a payment, the lender is still calculating interest (it may be as much as 22.9 percent or 26.9 percent, depending upon your creditworthiness) for each month.

So if you haven’t paid off your debt at the end of the promotional period, you’re charged interest as if you never had a promotional offer at all. On the other hand, when a major credit card offers zero-percent on purchases for a set period, it can be “waived interest.” So if you have a 12-month offer, they will waive the interest during those months and only start charging you monthly interest in month 13 going forward if you haven’t paid it off, rather than accrual from over the year.

Myth #4: It Won’t Affect Your Credit

Many people don’t realize that a zero-percent financing offer is similar to taking out a new credit card. When it comes to financing certain items, like furniture, sometimes the credit line is the exact same amount as your purchase. This can result in your credit utilization rate spiking, since the rate represents the ratio of your credit card balance relative to your available credit. Having a high credit utilization rate may lower your credit score, so always check to see what the available credit line is the store is extending with special offers.

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What You Need to Know:

There are various types of credit scores, and lenders use a variety of different types of credit scores to make lending decisions. The credit score you receive is based on the VantageScore 3.0 model and may not be the credit score model used by your lender.

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