What is the Catch for 0 Percent Financing Offers?

Everywhere we go these days, we are inundated with 0 percent financing offers. These offers are made on everything from flooring to electronics. They may offer you these terms as a way to get you in the door and help make the sale. They market it as a way to help you get the things that you need. While it can help if you use it correctly, they have to make their money from somewhere. There are a few catches that you should be aware of with 0 percent interest offers.

Hoping for Mistakes

When financing companies offer 0 percent interest offers, they will give you attractive terms with seemingly no interest to you. A popular term is "no payments and no interest for 12 months." With this term you have a year to pay off your account. You can make any payments that you want to during that time period. If you want to pay $50 one month and $1000 the next, you are free to do so. During that time period, you will not be charged a dime of interest.

When you open an account like this, the finance company is hoping that you do not pay it off in 12 months. When you have an account that is open for a year, you think that the due date is far off. You keep putting off making any payments. Then all of a sudden, you have a month to go and a large bill to pay off. If you do not pay off the entire balance in the 12 months, then you are hit with a large amount of interest.

The interest that you are charged will in most cases be similar to a credit card interest rate. In addition to paying a high interest rate, it will be retroactive to the beginning of the account. This means that it will be like you have had interest on the account since the first day you opened it and you haven't paid any of it off.

Another way that they can get you is with plans that require a payment during the interest free period. For example, you might buy furniture and get terms that say "48 months interest free financing." You will have to make a monthly payment every month for four years. If you miss a payment, then they start charging you interest for the rest of the term.

Discount Rate

In addition to hoping that you have to pay them interest, they also make money on the front end. They charge the company that you set up the account with a discount rate. Sometimes, this charge can be as much as 15 percent of the total purchase price. The company that sold you the goods can pass this cost on to you through higher prices or they can simply eat the cost. Regardless of how it is paid, the finance companies will get their money somehow.


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