If you go shopping, odds are that you've seen one of the "0% financing" offers that retailers use to entice you to make your big-ticket purchases from them. You'll see these advertised as "no interest for 12 months" or "90 days same as cash," or something similar.
Source: Wikipedia.
While these can be very good deals for you if you pay them off before the promotional period runs out, the sad reality is that most consumers don't.
With the holiday shopping season right around the corner, you're likely to see more and more of these offers. Here's how even 0% interest can come back to bite you, and a better option you could use.
Don't confuse deferred interest with waived interest
These terms are two similar-sounding ways of saying two very different things.
Waived interest means that the lender will not charge you interest at all during the agreed period of time. For example, if you buy a $1,000 product at a 12% annual interest rate but have waived interest for the first three months, the interest simply doesn't accrue during that time period. Once the three-month window is up, the balance remains $1,000 (or whatever you haven't paid off), and interest begins to accumulate.
Unfortunately, virtually all of the "0% interest" offers from retailers are of the deferred-interest variety. Basically, the interest starts accumulating from day one, but you won't have to pay it if and only if you pay off the entire balance before the promotional period ends. And if you're even one day late on a payment, many such programs will immediately end the promotional period and hit you with all of the accumulated interest.
Here are some retailers that offer deferred financing programs, so you'll know where to be on the lookout.
A real-world cautionary tale
When I was in college, my roommate thought it would be an excellent idea to take advantage of Best Buy's offer of 24-month interest-free financing to buy a 60-inch TV for our apartment for about $1,700.
Source: Wikipedia.
Not fully understanding how the program worked, he made the required $50 minimum payments, and by the time the promotional period was over, he had paid down all but $500 of the balance. He figured that just having to pay interest on the $500 wouldn't be so bad. Boy, was he wrong.
Because the 29.9% APR he was given began accumulating "deferred interest" from day one, as soon as the 24-month promotion window ended, $645 in deferred interest charges were added to the outstanding balance, bringing the total amount still owed to $1,145 (and this for an outdated TV that could have been had for about $800 by that time).
A traditional credit card might be a better idea
If you apply for a traditional credit card with a 0% introductory APR on purchases, you will probably be better off. Most, if not all, of these deals are of the waived-interest variety.
Looking back at the case of my friend's TV, if he still had a $500 balance at the end of the promotional period, he would simply begin accumulating interest at that point, which would amount to about $12.50 per month to start and would get lower as the balance was paid off.
He could have kept making his $50 payments and had the TV paid off in another 12 months. Instead, with the tacked-on deferred interest, he had to make $50 monthly payments for more than another three years.
There is no shortage of excellent introductory offers out there, such as this one from Citigroup, which offers a 0% APR on purchases for 18 months, or this one from JPMorgan Chase, which offers 15 months of 0% APR as well as no fees for balance transfers. For a more complete list of offers, check out this one by NerdWallet.
It all comes down to how quickly you'll pay it off
If you anticipate making some big-ticket purchases this holiday season, make sure you read the fine print when you see offers of "0% interest."
If you are fairly certain that you'll have the balance paid off by the end of the promotional period, it may be worth considering, but if there is even a chance that you won't, there is a better option out there.
