No money down, and no interest for 12 months! We’ve all seen the ads, and it seems like a great deal. You buy a high-priced item like a car, mattress, or appliance, and you get a year or more to pay it off without interest charges. What’s not to love?
We’re a society that’s all about instant gratification, and that’s why interest-free deals appeal to so many people. Instead of waiting until you have enough money for something, you can get it right now without financial penalty, or so it seems. If done right, interest-free deals can make it possible to get something you need right away while keeping cash free for other things, such as paying down other high-interest credit, until you get your bonus, tax refund, or inheritance from your rich uncle.
But, as with anything that seems too good to be true, interest-free deals can come back to haunt you, and if you aren’t smart, you could end up paying a whole lot more than you intended.
Interest waived, not interest free
Most interest-free deals are actually credit accounts, not a free loan. This means that the interest is actually accruing during the grace period, but you aren’t being billed for it. If you owe even $1 on the balance at the end of the grace period, you will be charged for all that accrued interest over the entire life of the loan in a lump sum, and it’s very often at a much higher percentage rate than the average credit card. You may balk at a bankcard that charges 18% interest, but most interest-deferred deals charge an appalling 25-30% if you don’t pay the balance in full before the end date.
Credit rating consequences
Because many interest-free deals are actually a credit account with the maximum balance set at the amount you need to make your purchase, they look like a fully maxed-out credit card on your credit report. A good credit score depends on using only about 10% of your available revolving credit, so if the interest-free deal shows up as a revolving account—and most do—your score will take a hit.
Beware of minimum payments
Most stores that offer interest-free deals will send you a bill with a minimum payment due each month. However, the minimum payment may not be enough to pay off the entire balance during the grace period. If you are counting on paying the purchase off with equal monthly installments, be sure to calculate the actual amount necessary to have the full balance covered by the end. Also, be sure to read the small print, because some agreements don’t let you pay more than the minimum amount due each month, then leave you with a big lump sum at the end you may not be able to afford. If that’s the case, you could end up stuck with all that accrued interest anyway.
Billing date vs. payoff date
Another detail to be aware of is the statement due date compared to the actual payoff date. They aren’t always the same, and you could end up being charged the accrued interest if the final date of your grace period is several days prior to your statement due date. Speaking of dates, if you make your final payment with a check or online bill-paying service, make sure the payment arrives before the end date of your contract.
Tips for interest-free deals
If you are very careful and read all the terms before signing, interest-free deals don’t have to be a financial trap. Some additional things to keep in mind include:
- Check all fees—some stores have a monthly fee, late payment fee, or credit establishment charge. These can add up quickly.
- Keep all payment options in mind. Sometimes it’s actually a better deal to just pay cash or use a traditional credit card. Being aware of all your alternatives may save you money in the long run.
- Be sure you know exactly how you are going to pay off the loan, especially if you aren’t making monthly payments. This falls under the “don’t buy more than you can afford” heading.
- Don’t make additional purchases on store cards. If you are given a higher credit limit than what you need to buy the original item, you may be tempted to use that credit for other things. Store credit cards generally have high interest charges, which you will have to pay on the additional goods. Plus, all payments above the minimum balance must, by law, be put toward the interest-bearing balance of the additional goods rather than the interest free items until the final two months of the contract, leaving you confused and in more debt than ever in the end.
