Companies offering zero interest loans promote these loans as no-risk opportunities for those who are borrowers. Major purchases that normally require a lump-sum installment are able to be spread over 12 to many years with no interest, which creates an appealing cash flow scenario. However, these loans can be a risk such as the temptation to make an impulse purchase as well as the temptation to spend too much, and the risk of being subject to hefty penalties for breaking the terms of a loan.
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Key Takeaways
- Zero interest loans, in which there is only the principal balance that has to be repaid, frequently induce buyers to buy automobiles, appliances, and other expensive items.
- These loans force borrowers to adhere to strict monthly payment schedules and bind them to strict dates by which the total amount must be paid back.
- If a borrower fails to adhere to the loan conditions are subject to hefty penalties.
- The loans are generally only available to potential buyers who have FICO scores of 720 and better.
Zero Interest Loan Basics
The name of the loan suggests that an interest-free loan is one in which only the principal balance must be paid back, subject to the condition that the borrower abides by the time-bound deadline to which the balance must be paid. The event of non-compliance with the deadline can result in severe penalties. In particular, the lender could revoke the clause that prohibits zero percent and charges interest backdated on the loan.
A common feature in electronic retailers and car dealerships; these loans are made by third-party lenders and not provided by the store itself. To be eligible to receive these loans applicants generally need to have a FICO score of at the minimum of 780. 1 In most cases, the zero interest loans option is only available for short-term loans 24-months for retail stores, or up to 36 months for car dealerships.
Zero Interest Loans and Impulse Purchases
Dealerships regularly flood local radio stations with advertisements that promote zero interest loans deals. Potential buyers should only be enticed by the bait when they truly require a car and are financially in a position to buy one. However, these ads frequently encourage buyers to make impulsive purchases, even though it’s not feasible to make such a purchase.
It’s not surprising that salespeople use promotional offers with zero interest to push customers to make more costly purchases in an effort to increase the commissions they earn. Some dealers use zero-interest deals as leverage during price negotiations. With such attractive financing offers the salesperson is often reluctant to reduce the prices for purchases. Buyers should be wary of overpaying because of deals with low interest.
The promotion of zero interest loans could be attractive to buyers who do not meet the requirements for these types of programs. Often, unscrupulous salespeople lead people to loans that actually charge interest. After seeing a stunning new automobile or a glossy flat-screen TV, a lot of customers are willing to take loans from these companies even though the terms aren’t favorable.
Zero-Interest Loans and Overspending
These loans are designed to entice customers to spend their hard-earned cash on fancy new cars and other expensive products. Instead of buying a sensibly used vehicle for $20k or more, one could select a new car that has a price tag of $30,000, believing that they’d be paying interest of $10,000 in the end, even if he was not getting the same great conditions for the loan.
Zero Interest Penalties for Loans and Fees
While they might seem like something out of the realm of possibility but zero-interest loans can turn into nightmares for people who don’t understand the terms of the loan. Loan providers are quick to terminate zero-interest loan options for those who are in default on one payment. This is the case for revolving loans that are 0%, for example, annual percentage rates (APR) credit cards and installment loans, like the car loan. The borrowers who choose to take advantage of such deals must be aware of the penalties for making payments late or in excess of the terms of the loan. 2
Consumers can improve the value of their FICO scores by making sure they pay their phone and utility bills on time, as well as keep their balances on credit cards in check.
Conclusion
As the name implies an interest-free loan is one in which only the principal balance must be paid back, subject to the condition that the borrower abides by the time-bound deadline to which the balance must be paid. The event of non-compliance with the deadline can result in severe penalties!!