Why 0% Finance Offers Don't Always Make Sense

Before you sign up for 0% financing, keep this in mind.

Recently, my home's air conditioning system decided to break, without warning, on pretty much the hottest day of the year. Since the system was older, repairing it didn't make sense for my personal finances. I was pretty much forced to replace it with a new model -- at a price tag of roughly $7,000. I was really, really unhappy.

Thankfully, I happened to have the $7,000 available in my savings account to cover that expense. I make a point to set money aside for emergencies, because as a homeowner, I know that costly repairs can pop up at any time.

I almost didn't withdraw from my savings, because the air conditioning company offered me a deal that seemed good -- finance my new air conditioner at 0% over 24 months. With that offer, I could've taken on a monthly payment of around $300, which my incoming paychecks could cover without tapping into my savings. And since it was a 0% financing offer, I figured I had nothing to lose.

In the end, I paid for my replacement air conditioning system outright, using money from my savings. Here's why.

The catch with 0% financing

You might assume that 0% finance offers are too good to be true. But for the most part, they're totally legitimate. It's not uncommon to get these offers to finance a purchase, whether it's furniture, a new car, or a home repair.

But before you sign up for a 0% finance offer, it pays to ask one key question -- is there a discount for paying outright?

Often, when companies offer 0% financing on an item or service, they build the cost of financing into the quote for the job. I was quoted around $7,200 to replace my air conditioner at first -- but that $7,200 assumed I'd finance the replacement unit.

When I asked about a discount for not financing my air conditioner, the quote dropped to about $6,900. That's still a lot of money. But since I had the cash in my savings account, and withdrawing that money wouldn't deplete my emergency fund, I figured it made more sense to pay for my air conditioner outright and save myself the $300.

This isn't to say that you always qualify for a discount if you forgo 0% financing and pay in one lump sum up front. But in some cases, you will enjoy some savings for paying outright. And that's why 0% financing offers don't always make sense.

If you don't have money in savings to cover a given expense, or you want to maintain more liquidity (meaning, you want to make sure you have plenty of access to cash), then 0% financing offers are often a good way to go. Say you're looking to buy furniture worth $5,000, and can finance it at 0% over two years. If you only have $7,000 in your savings account, you should probably sign up for the financing deal. If you don't, you'll leave yourself with a mere $2,000 in the bank to cover unplanned expenses.

But if, in that example, you have $25,000 in savings, you may want to pay for your furniture outright if you can get a discount. In that case, you'll still have $20,000 cash, and if that's enough to cover at least three full months of living expenses, you don't have to worry about taking a $5,000 withdrawal.

In my case, I'm glad I asked about paying up front for my air conditioner in exchange for a modest discount. While I'm unhappy that expense came my way, saving a little money on it made me feel better about the whole situation.