Photo by Artem Beliaikin from Pexels
When it comes to financing a new purchase, interest rates can be a significant deciding factor. While they may seem like a small factor at first glance, interest rates can greatly impact the total cost of your purchase.
But have you heard about interest-free financing? You may have seen the signs in store windows or even received offers by email. Is it a good idea, or is it too good to be true?
Are they really interest-free? Or do they come with strings attached? Keep reading to find out.
What Is Interest-Free Financing?
Interest-free financing is a financing option that allows you to purchase something now and pay for it over time without accruing any interest. This option can be an extremely appealing offer, especially if you’re short on cash or need the item right away.
You may have seen this zero-interest financing option at a furniture store, where it’s often advertised as “12 months same as cash” or “no credit needed.” It also pops up around big holidays like Black Friday and Christmas when retailers are willing to do anything for their business (including offering 0% interest).
How Does It Work?
When you take advantage of no interest loans, the store or lender will give you a set number of months to pay off your purchase. You won’t accrue any interest in the purchase price during that time.
That’s a big deal because your purchases would likely accrue interest from day one if you were to go the credit card route. It might not seem like much at first glance, but interests can add up fast — especially if it’s for a large purchase.
In other words, by taking advantage of the interest-free financing offer, you can avoid fees and save money in the long run. However, there is usually a catch. Most interest-free financing offers come with a deferred interest clause.
It means that if you don’t pay off the purchase in full by the end of the promotional period, you’ll be charged all of the accrued interest from the beginning of the offer. Ouch!
So Is It a Good Idea or Not?
Interest-free financing can be a great way to spread payments for big purchases over time without paying any extra money. However, it’s essential to read the terms and conditions carefully to know what you’re getting into.
Go for it if you think you can pay off your purchase in full before the promotional period ends. However, if you think there’s a chance that you won’t be able to pay off the balance on time, avoid interest-free offers at all costs (unless, of course, you enjoy throwing your money away).
Here are some essential things to keep in mind:
- Shop around. Some stores offer 0% financing but with an automatically deferred interest clause. Others charge extra fees just for taking advantage of their “no interest” offers. If you’re going to take advantage of this type of shopping opportunity, shop around and find out which store offers the best deal so that you don’t waste your hard-earned money.
- Read the fine print. As we mentioned earlier, many interest-free financing offers come with a deferred interest clause that charges you all of the accrued interest if you don’t pay off the purchase in full before the promotional period ends (usually 12 months).
If possible, avoid these offers and choose one without any strings attached. There’s no sense paying extra for something now to have them charge you more later on down the road!
- Don’t forget about sales tax. Many “no interest” financing deals don’t include the cost of taxes, so make sure you factor that into your total price when deciding whether or not it’s worth taking advantage of these types of offers.
- Know your limits. One of the biggest mistakes people make when taking advantage of interest-free offers is using them as an excuse to spend more than they can afford. Just because you have a year to pay off your purchase doesn’t mean you should buy something that’s way out of your budget. Stick to what you know you can afford, and you’ll be just fine!
Bottom Line
If it sounds too good to be true, it probably is. When shopping around for an interest-free offer on big-ticket items like furniture or appliances, keep this phrase in mind: “If there’s no catch, then why are they offering such a deal?” The answer may not always be clear, but you can be sure that if a deal sounds too good to be true, it probably is. So be careful before signing on the dotted line!
