0% Interest: Not as Free as You Think

The amount of money that lenders have to give out to consumers this year is absolutely enormous. Loan companies will lend out money for things such as mortgages, second mortgages, home equity loans, credit cards, purchase financing, automobile loans, payday loans, rent to own, 90 days same as cash, and the list just continues to go on. There is so much money available to loan that people who previously were unable to get credit can get all the credit they think they ever needed.
One of the more interesting results of so much credit being available is 0% financing. Some automobile retailers, credit cards, furniture stores, and banks are offering loans with an introductory rate of 0%. Of course they are paying money to be able to lend you at 0%. We all know that these companies aren’t out there to give us charity, so how do they make their money? Often times the cost of the interest is built into the price of the product, so it only appears you are getting 0% interest. In other instances, there are some “gotcha” fees which these companies put in their fine print to charge you interest when you thought you were paying nothing in interest.

Recently the Chicago Tribune wrote an article about a list of “gotcha fees” which often come up in 0% loans. First they warn us to read the fine print. Often times if you the consumer do not pay off the loan in full by the end of the 0% interest period, you could get hit with retroactive interest, and have to pay for all of the interest accumulated which you thought was nothing over the 0% period, ouch!

Let’s look at an example. Let’s say you decide that you want to get a whole bunch of new furniture to replace the old stuff. So you walk down to the furniture store and buy a whole bunch of new stuff, and decide that you just can’t pass up their 0% for a year offer, so you finance it. You make your monthly payments, and after one year is up, you’re still making payments, and all of a sudden you get hit with all of the backdated interest on all of the money that you borrowed.

You can also get hit by opening up a store credit card to get the 0% rate. This will actually hurt your credit score in two different ways. First if you have too many credit cards, your score will suffer, and secondly they will usually open your account with a credit line almost equal to that of your purchases. Most experts say that you should keep y our balances below 35% of your actual limit.