Avoiding the Pitfalls of 0% Financing
Have you considered applying for a credit card offering a 0% interest/deferred interest option when making a big purchase? While a 0% financing offer may sound like the perfect fit for you and your finances on paper, have you really looked at the ins and outs of the offer? Despite the obvious perk of having 0% interest over the payback period, there are actually some significant downsides to a 0% interest credit card that not many are truly aware of. Before making a decision on a 0% financing offer, it’s important to review some of the pros and cons and make sure you can financially afford to go that route.
No interest for set period of time. You really can open up a credit card and take advantage of 0% interest for a predetermined time frame. Of course, with all financial endeavors, your credit score plays a very significant role is determining if you’re eligible for these types of offers.
0% financing can help pay for big-ticket items. Without paying for them all at once up front, using a 0% offer for larger purchases may allow you to get that new TV or couch without paying any interest in the process.
Added benefits. Some 0% offers may even have additional perks like cash back rewards or points that you can take advantage of.
Not paying off the balance could result in enormous finance charges. These offers are basically deferring the interest for you within a set period of time. If you’re able to pay off the entire loan in the time frame, the interest is forgiven. However, failure to pay off the full balance, can result in you being penalized by having the deferred interest added on to your unpaid balance.
The 0% APR doesn't last forever. Once that 0% promotion has run its course, it’s finished. Are you aware of what the regular APR on the card will be after the deferred interest period is over? These rates can range from around 15 to 25% and can sometimes be as high as 30%, so be careful about carrying over a balance if you’re reaching the end of the promotional period.
Missing a payment can be costly. You can kiss the promotional period good bye if you fail to make a payment or are even late by a few days. Doing so can result in getting slapped with the deferred interest.
Minimum payments aren't enough. The credit card company will likely only require you to make a minimum monthly payment, which is typically a percentage of the outstanding balance. You’re very unlikely to pay off the balance before the promotional period expires if you only make the minimum payment.
Play by the rules and make your payments on time and in full and you’ll take advantage of a no-interest offer. Be late on a payment, miss one or lose the ability to make a payment and you could end up with a bloated interest rate, in addition to retroactive interest, which could ultimately put you further behind than when you started.
While you may have plans to pay off that card before the promotional period expires, sometimes unexpected things can and do occur. No one financial decision situation is the same, so it’s important to fully review your finances before making your decision. Having a plan in place is crucial to the success of these offers. Whether you’re approaching the promotional end date or it’s already passed and you’re stuck with a large balance, come see us for a free loan review today!