It’s not uncommon to finance large purchases and pay them off over time. Say you need a car, for example, and it costs $30,000. That’s a lot of money to empty out of your savings account — if you even have that much cash to begin with. Instead, you may decide an auto loan is the better or necessary way to go.
Of course, the downside of financing purchases is having to pay interest on them. But that’s not always the case. If you qualify for a 0% interest offer, you might manage to avoid paying extra money in interest form.
But while 0% financing might seem like a great option in theory, financial expert Dave Ramsey warns that it’s not the best one in practice. In fact, he advises consumers to steer clear of 0% interest offers — even if they seem like an excellent deal.
The trap of 0% interest
Generally speaking, 0% financing is an option that’s made available to consumers for a limited period of time. Say you’re able to finance furniture at 0% interest. Chances are, that rate will only apply for, say, six months, a year, or even two years.
But what happens if your purchase isn’t paid off at that point? From there, you’ll generally get stuck with a really high interest rate. And you might then end up spending more than expected.
See, often, what will happen with 0% interest offers is that if you don’t pay off your entire loan balance by the end of your introductory period, you’ll accrue interest on your entire balance. So, let’s say you get 0% financing on a $10,000 furniture purchase, but that 0% runs out after a year and turns into a 15% interest rate. If, at that point, you still owe $8,000, you’ll be charged 15% on the initial $10,000.
(To be clear, this won’t always happen. It depends on how your financing agreement is worded. But it’s a possibility you’ll need to gear up for.)
0% interest can lead to overspending
Another big problem with 0% financing? It might tempt you to spend money on things you really can’t afford. It’s one thing to buy a car and finance it because you need a way to get to work and don’t have the money to buy one outright.
But let’s say you have a house full of perfectly functional furniture, and you’re tempted to upgrade because you see a 0% financing offer. If you don’t have the money to buy new furniture, you really shouldn’t be getting any. Instead, you should wait until you’ve saved enough to cover that purchase in full.
Finally, recognize that in some cases, 0% financing means paying more for the item you’re buying itself. Say you’re looking at a car with 0% financing for a period of time. Chances are, Ramsey warns, you’ll be paying a higher price on that vehicle in the first place.
At the end of the day, the one thing Ramsey wants consumers to remember is that “nothing is free.” So the next time you’re tempted by a 0% financing offer, you may want to run the other way — or start saving for the item in question so you can buy it with more peace of mind.
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