 Taking
advantage of zero-percent loan
|
 Dear
Dr. Don,
I can borrow $10,000 at zero percent for one year. Would it be good
for me to pay off my car ($10,000) when after a year's time the
loan would turn to 9.9 percent interest versus the 5.4 percent rate
I have on the car loan now? Or would it be good to put it into savings
to collect interest and pay the whole thing off when it became due?
Is there a good scenario that would benefit me in some way to take
advantage of the zero percent rate?
-- Becky Bounty
 Dear
Becky,
With the targeted Fed Funds rate at 4 percent,
up 3 percent since June of 2004, those zero-percent offers are getting
pretty rare, and I can understand you wanting to capitalize on a
year's free use of $10,000. Read the offer carefully to understand
its terms, including any purchase requirements or repayment assumptions.
One late payment on this or any of your credit cards
or other debt could be sufficient reason for the rate to change
to a market rate, or worse. All of a sudden that zero-percent offer
is charging you 10 percent or even 20 percent, and all your calculations
of financial savings are blown out of the water.
If this is a balance transfer offer for a credit card,
you may have some difficulty using the zero-percent financing to
pay off your car or invest in a one-year CD. If it is a balance-transfer
arrangement, don't forget to consider the balance transfer fee in
your analysis.
You didn't say how long your car loan has to run,
but if it is two years or more, then replacing a 5.4 percent loan
with zero percent for one year and 9.9 percent for the second year
really doesn't buy you all that much, especially since you'll be
paying down the car loan over time versus facing a $10,000 balance
a year from now. Before you pay off the car, make sure the car loan
doesn't have a prepayment penalty.
If you're not trying to free up money in your monthly budget
then I like the idea of borrowing the money and investing it. If things go wrong
with the offer you can free up the funds and pay off the loan.
But these zero-percent offers tend to work best when
you want to take a little holiday from paying interest and use the
reduced interest expense as a way to pay down your outstanding debts
as rapidly as possible. Using the car as an example, you pay off
the car then put the car payment amount into the bank each month
to pay down the loan at the end of the year. You've earned interest
on the deposits and didn't pay interest on the loan.
So it's not just the use of
the money for a year, it's what you're going to do with the newfound financial
flexibility in your monthly spending plan that should determine whether it's a
good idea to take advantage of this offer. | 
