No payments! No interest! You won’t pay anything until next year!
The ads are tempting. Who wouldn’t want to sleep on a luxury mattress or a binge watch show on a big screen TV – without paying a dime for 18 months (or whatever the advertised period)?
In this article, we will focus on retail stores. A growing number of locations offer this type of funding, including:
But are the claims real? Can you really wait more than a year to pay for furniture, electronics, and more?
And what if you run out of money at the end of that period?
We explain how the interest free loan offers work and how they work for you, not against you.
Are Zero Percent Deals Really Interest Free Loans?
Knowing what to sign up for when you fund a big ticket item can help you avoid spending too much on your purchase – or spending years in debt.
We start with the difference between a zero percent interest rate and a deferred rate offer.
Zero percent interest rate offers
Zero percent interest and deferred offers are the same in that you enjoy a promotional period – between a few months and a few years depending on the offer – when you do not have to pay interest on the balance.
If you pay off the balance during this promotional period, you won’t pay any interest – essentially an interest-free loan. Yay!
However, if you don’t pay back the remaining balance, you will quickly see the difference between interest-free and interest-bearing loans.
Unlike the “no-payments” you might get with a deferred offer, you’ll have to make at least the monthly minimum payment for credit transfer cards – or lose the interest rate and pay fines.
If you have an interest-free loan balance at the end of the introductory period, interest will accrue on what you currently owe. (For reference, Credit transfer credit card offers are an example of interest-free promotions.)
So if you transfer $ 10,000 to a credit card to take advantage of a 12-month 0% interest period and pay out $ 8,000 during that time, the remaining $ 2,000 will accrue interest at the end of the introductory period. In other words, your card acts like a typical credit card with $ 2,000 in credit.
The ads you typically see at retailers relate to deferred credit lines. You are applying for funding through the business that issues loans through an affiliate financial institution.
This type of financing actually incurs interest on the original balance throughout the entire period. It’s just that if you pay off the full amount before the end of the promotional period, the amount will be waived.
One of the key words to look for in your finance contract is “Interest is set from the date of purchase.” If your agreement includes this statement, sign up for deferred interest.
Although interest-bearing credit cards are still more common, some retailers are – including Walmart – have switched to zero percent interest rate promotions. Read the fine print to be sure.
So if you pay back your balance within that time frame, you have essentially got an interest-free loan.
How do businesses make money from such deals? They depend on your inability to meet a deadline. If you do not pay off the total amount by the end of the introductory phase, you will be charged retroactive interest on the total amount.
what does that mean to you? Let’s look at an example:
You buy a $ 2,000 sofa with a 0% interest / no payment offer for 24 months. After the introductory phase, the interest rate is 18%.
The day before the end of the introductory period, you will pay out USD 1,900 of the balance. But you can’t quite come up with the last $ 100.
When the introductory period ends, you owe the remaining $ 100 plus the accrued interest of $ 859 on the original balance. So you’ve owed from $ 100 to now $ 959, which will result in 18% interest.
What to do if you are offered a deferred loan
Here’s the thing: With deferred financing, nothing is inherently evil.
It can actually allow you to hold on to your money while paying off a large ticket item in installments.
But it takes discipline and a realistic assessment of whether you can pay out the remaining balance on time.
Before you sign anything, take a look at your budget and savings, and ask yourself the following questions:
- Could I postpone this purchase and save the money so I can pay in full instead? Although you will be late in receiving the item you want, paying in full cash eliminates the possibility of you ending up paying interest on your purchase.
- Can I realistically afford the payments necessary to pay off this item or service within the given timeframe? Divide the remaining balance by the number of months – and subtract at least an extra month in case you can’t pay a month. So if you borrow $ 800 for a six month plan, divide $ 800 by 5 – you should be able to pay $ 160 every month for five months. If you even hesitate whether your budget can bear the cost, reconsider this financing option.
- How stable is my income? If there is a chance that you will lose the income that you are relying on to repay the balance, consider a sideline to give yourself more financial cushion. (Search the latest work-from-home gigs in our work-from-home portal.)
- Do I have an emergency fund? Unless your purchase is for an emergency, you should not use this money to pay your balance. However, emergency funding should be available to cover other unexpected expenses – rather than using the money you budgeted for your payments. No emergency fund? Prioritize getting started before making the purchase.
- Have I considered other options? Even taking out a personal loan with a 10% interest rate is likely to give you a better deal than a much higher rate if you cannot repay the balance on time. If you don’t want to go through a loan application process, consider buying now and paying later additional payment or Installment plans for credit cards.
Read the contract for the end of the promotional period carefully. You should make the final payment well in advance of the deadline to ensure that you are credited with the full refund.
What to do when you have a deferred loan
What if you already have an interest-bearing loan? Make paying out the balance a priority.
Start by digging up your agreement – find out the original balance and how many months or years you have left in the promotional period. Create a budget that includes the payments you need to make to pay off the balance by your deadline (you can use the formula from # 2 in the list above to calculate your monthly payments).
Do you need an incentive to pay? Check your monthly statements, which should state how much interest you have already accumulated.
Consider cutting other parts of your budget to add that money to your payments, whether or not they do Cut your food budgetwith administrative forbearance too Save on student loans or find other ways earn money and save money.
Also, consider cheaper loan options that allow you to pay off the remaining balance. A personal loan can help you set up a payment plan. However, as you near a withdrawal, you might want to use a credit card to pay the balance.
Yes, you may end up paying your credit card interest on the remaining balance. You should compare how much interest you would pay on the credit card against your loan to decide which is the better deal.
Keep in mind, however, that interest will only begin accruing from the day you debited the balance on your credit card – not from the time you made the purchase all those months ago.
Tiffany Wendeln Connors is an associate and editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.
This article originally appeared on www.thepennyhoarder.com