interest-free financing deals
Retailers are promoting six-months-same-as-cash (or even a year)
for home furnishings, appliances and electronics. What do you see as the problem?
Are there opportunities to make payments during the interest-free period? Is it
inconvenient to pay down the debt until the interest period begins? I promise
not to indulge, I'm just curious about the pitfalls as you see them. Also, the
auto industry has these zero-percent financing deals for four or even five years.
Are they problematic as well? Do the lenders ever renege and begin charging interest?
Can they? Thanks for all your sound, thoughtful insights and advice. -- Linda
Let's start with retail purchase promotions of no-interest financing
for a set period. This type of financing works best if you have a plan to pay
off the balance before the interest-free period ends. The problems begin if you
still have a balance once it expires. What many consumers do not realize about
this type of financing is that, often, interest is charged on the balance owed
from the original purchase date, not from the date the interest-free period ends.
Here's an example: You buy a refrigerator for $1,500 in January
with an agreement of six months' interest-free financing. You make monthly payments
of $100 during the six months. On July 1, according to the agreement you signed,
interest charges are assessed on the remaining balance of $900 from the date of
purchase, Jan. 1. The interest charges at an average APR of 18 percent (this could
be higher depending on who the dealer uses for financing) would total $81 giving
you a balance of $981. If you continue to make a payment of $100 a month, it will
take you 11 months to pay off the balance and you will have paid a total of $169.24
in interest charges.
A better way to take advantage of the
interest-free financing using this example is to wait nine months and save the
$100 a month payment you can afford to use as a down payment when purchasing the
refrigerator. You can then plan to pay off the remaining balance of $600 before
the interest free period ends and save the $169.24 in interest charges. You could
then buy a microwave or other kitchen item with that money instead of losing it
to interest charges or begin saving for your next large purchase.
sum up; to take maximum advantage of the interest-free financing agreements, have
a plan to pay off the balance before the interest-free period ends and since one
size does not fit all, read and understand the deal before you sign.
on to zero-percent financing for car loans. No, the finance company can not start
charging you interest as long as you are making your agreed upon monthly payments.
Some things to keep in mind before jumping on the new-car zero-percent financing
- You must have near-perfect credit to qualify
for an interest-free loan. Despite all the hoopla about it, only about 15 percent
of those buying cars end up with zero percent financing. Call the dealerships
you are considering and ask what the lending criteria are for zero-percent financing.
Check your credit report before shopping for a car and you will have some indication
of whether you qualify.
- Do not purchase more car than you
can afford. If you can't afford the payment, the interest rate doesn't matter.
sure the dealer is not offering a better cash-back alternative incentive. Depending
on the sale price of the car and your trade or down payment, a cash back deal
may be more money in your pocket than what you would save in interest charges.
- Be careful with extending
a loan beyond five years. If you wish to sell or trade in the car in a couple
of years, you may owe more than the car is worth. This is called being upside
down in your loan.
Both of these financing opportunities
can be a great help in allowing you to acquire things you need at a lower cost.
But remember, they should fit into your plan for how you want to spend your money;
not just allow you to fit into someone else's plan!
Debt Adviser, Steve Bucci, is the president of Money Management International
Financial Education Foundation. Visit MMI
for additional debt
advice or click here
to ask a debt question.