Introduction to Zero-Percent Financing
Zero-percent financing has become a standard option with many traders today. While this was once a special offer, it’s now a very prevalent norm.
It’s a very attractive offer, too, because zero-percent financing is almost like having free money for 12 months (or however long the loan term lasts).
But at the same time, consumers tend to forget that it’s an advertising scheme designed to tempt you with products that you couldn’t ordinarily afford. So is it really that attractive?
How Zero-Percent Financing Works
Traders have special arrangements with their bank of choice to be able to offer interest-free loans. Typically, these are classic installment loans, with a fixed term and installment amount. Of course, there’s an important difference: namely, the lack of interest.
When you sign-up for zero-percent financing, the bank pays the loan payment directly to the seller. As the customer, you then pay installments directly to the bank.
The first entity to benefit from zero-percent financing is the trader, of course. Using this advertising and sales technique, they’re able to attract more customers. More customers mean more demand and more sales. Even if the business does end up having to pay the financing fee, they’ve already worked that expense into their selling prices.
Second, the bank benefits even though they’re losing out on potential interest-rate income. After all, when you sign-up for zero-percent financing, the bank gets some valuable information from you. And they can then use this data to customize offers for future contracts with you. As a result, they save on advertising costs.
But what about the consumer? What are the real pros and cons to zero-interest finance?
- Acquisitions are available at no extra cost, despite the lack of equity capital.
- You won’t need to dip into your savings or withdraw funds from your investments.
- Temporary shortages in cash flow are less likely to affect your ability to pay.
- Zero-percent interest rates are often only guaranteed for consumers with a very high credit score.
- The loan terms are usually a lot shorter (24 to 36 months vs 60 months).
- Traders typically limit zero-percent financing to less popular products.
- There are sometimes hidden costs.
- You have less room to negotiate prices, which are usually already higher than you’d pay at some competitors.
- Cash rebates often offer better savings.
- With zero-percent financing, aggressive advertising makes consumers believe you can afford to spend more money.
- It will almost certainly hurt your credit score.
Zero-percent financing looks very attractive at first, but the more you look into it the more you realize it’s ill-advised. The trader’s employees are often more focused on making a sale to earn a commission. They aren’t always properly trained to answer questions and give explanations, so you take a big risk by agreeing to the zero-percent finance option.