The Truth Behind Interest-Free Financing
0% financing or interest-free loans sounds like a dream to many of us. Get to borrow money and not have to worry about paying any additional costs back, how good is that? Well, it’s not all as easy and wonderful as it may seem. Interest-free loans seem good up front, but it’s all the hidden expenses and clauses that can get the better of us in the end. We figured some of these truths needed to be exposed as getting caught out yourself, isn’t worth the trouble. So here are a few bits of information that it might pay to be aware of before you decide it’s time to get an interest free loan.
It may just be a trick to draw you in
“And it’s all interest-free!” Boy, how many times have we heard that one from over-enthusiastic T.V commercials? The concept of interest-free products acts as a trigger to get us interested and in the door. One of us see’s the ad, convinces our significant other that it’s a great deal and in the weekend, drags them down to the establishment to enquire in person. It’s at this point that they have got you. You’re in the door, primed to buy, expecting to get your lovely rate. Only to then find out you don’t meet the perfection required to be granted such a deal. Instead they can serve you with their next best rate that is more suitable for someone like you. Walking away at this point is difficult, and not all of us can do it. So, in the end, we make the purchase, sound familiar?
Interest-free financing is often used as a lure on borrowers to get them in person and into a situation where they are less likely to walk away. To meet the conditions of such a low rate, one must have an exceptional credit score and reach the insane requirements that they may have in place. Don’t get us wrong, getting an interest free loan is achievable and can be great if you are eligible. But it might pay to do your research first and find out if you are eligible before you go into the store and begin discussions.
They often have large penalties
But let’s say you can get an interest free product, whether it be a new car, credit card or even a loan. You will be living sweet, everything fine and dandy, until you make a mistake. The penalties associated with interest-free financing is often higher than when you borrow regularly with agreed upon rates. The penalties might seem harsh, but if you miss a payment or are late on one, you might find yourself having a percentage of the remaining balance added on top of what is ever there. Additionally, if you slip up too much, they might cancel your 0% interest deal and instead slip you into a default loan rate that could be anything from 13.95% – 25.95%. The penalties for missing a payment or going into arrears are quite steep, so staying on top of something that is often described as worry free, can be quite worrying in the end.
They find other ways to make their money
The harsh penalties, however, isn’t the only way interest-free loans make money. Additional fees such as documentation, processing and transaction charge, merchant fees or service charges, can find themselves somehow added on each month. Establishments might take some of their freely offered services and charge them within the lump sum of the loan. Others chuck on additional monthly servicing fees or merchant fees to their deals, so you are paying a percentage of the remaining balance still in additional fees, similar to what you do with interest.
Not all deals are as good as they sound and you often need to read the fine print to find out what you are really getting yourself into. The additional costs can add up and make your regular payments a nightmare to handle, meaning a slip up is even more eminent. Take care when you are offered these deals, as you may find yourself paying more than what you would have gotten otherwise with a regular borrowing interest rate.
They can hurt you in the future
Lastly, an interest-free loan can impact your borrowing potential in the future. The requirements to get such an excellent interest rate might require perfection in the credit score department. Well, having a credit check done, only to find that you don’t meet the requirement, can then impact negatively on your credit score.
Let’s speak hypothetically for a second. Let’s say we have a credit score of 548 and we get a credit check for an interest-free loan but get declined. This enquiry is now on our history and could lower our credit score below 548.
We use this situation as an example, as having this lower score means a couple of things. Now, we are even less likely to get an interest free loan in the future and also any additional finance borrowing rates we get in the future may also be higher because we appear to be a more significant risk to the lender. You might be wanting to get your first home or a new car for your family, only to be shocked that you are not offered the rate you were told you would get last month. These hidden traps can be nasty and could even have a terrible dominoes effect if we are not careful.
So there you have it, the truth behind 0% financing. It’s not as great and smooth as it all seems as the hidden costs and perils involved can get you trapped. Don’t be lured in by their hopeful promises and 0% rates. An interest-free loan can spell trouble for you if you aren’t careful. Do your research and shop around. It might be an interest-free car, credit card or loan, doesn’t matter what it is, there is most likely a catch so try your hardest to find it out. Often it’s not worth entering a contract and being unaware of what can happen as the penalties could be too much. Stick to what you know is safe and don’t take chances when it comes to your finances.