Why you need to be careful with 0% Finance Offers
Recently one of my work colleagues recounted a harrowing experience he had with a 0% finance deal on a sofa he bought 12 months ago. The upshot of it all is, the sofa ended up costing him almost twice as much as the original ticket price due to accrued interest because he missed his payment date.
This got me thinking and I decided to investigate the world of 0% finance.
It would be really hard to imagine how the world today could operate without the facilities for lending and borrowing money, in fact the majority of us take this for granted. Investors, businesses and individuals all rely on credit arrangements such as credit cards and loans for day to day use, and for the financial institutions and banks, lending money is their primary reason for existing. Credit is incredibly powerful to any economy as it can support and provide financial security so long as it is not used recklessly.
Suspicious of credit?
The older generations have often been guarded when it comes to credit, and most would and still do avoid it. This is probably because they did not want to find themselves in a situation where they were unable to pay back the debts. Today, attitudes have changed and credit is now seen as a cash flow solution in the form of an agreement that is taken out with the lender to provide a sum of money at a reasonable interest rate, repaid over a dictated timescale. Borrowing and lending could be compared to buying and selling – a simple business transaction.
A system has been devised that is known as a personal credit rating which assists lenders when they are making decisions about whether or not an individual should be extended a line of credit. Detailed records show the credit history of every person that has had a loan or uses credit cards etc. and how well they have kept to the designated repayment plan. There is a numerical score that is assigned based upon how well an individual has conducted themselves with regards to any credit agreements and this score (credit rating) is made available to mortgage brokers, lenders and all other companies that supply goods and services on credit terms.
Importance of credit rating
Your credit score should not be taken lightly as this will influence all future financial transactions where you want to borrow money, or use a credit facility to access goods or services and a bad credit record will seriously hinder you. The majority of people will want to obtain a mortgage at some point or apply for a loan, buy a car on hire purchase or get a credit card and a bad credit rating can prevent you from being able to do those things.
Good Credit Record
A good credit rating is now widely acknowledged as a very important asset and many people actively take steps designed to establish and maintain a good record. They can do this by making regular/on time monthly payments on a credit card (ideally more than the minimum amount can also help towards a good credit report) and making mortgage payments on the agreed date. Usually repaying the loan on time is enough to record a good score that the lenders will then be able to see.
Be aware of your score
It is important that you are aware of your own credit rating and you can find this through a number of sites on the internet. You may have to pay a small fee but knowing and understanding your credit record is well worth the price. Should you find errors on your report, these can be rectified quite simply particularly if you have paperwork to substantiate the most recent information. Credit is an extremely important element of anyone’s financial situation and used correctly it can be most beneficial to your financial health. You can get paid for doing a credit check by signing up to Experian via Topcashback. You will get £2.25 for signing up via Topcashback and 30days free use of Experian. Simply cancel your subscription during those 30 days – don’t forget – and it will have cost you nothing for your credit report and you will have an extra £2.25 in your Topcashback account.
What 0% finance really means
Currently, there appears to be a boom in finance deals offering 0% interest and nothing to pay for an entire year. It really sounds too good to be true to be able to buy something and have it immediately and not have to start paying for it until quite a long time later However if you are contemplating this type of offer I do hope that you have read the small print that explains all of the details.
What to look out for with 0% finance
Before entering into any 0% finance agreements here is some advice on what you should be looking out for when it comes to 0% financing.
Pay before the promotion comes to an end
0% finance deals are great provided that you are able to pay off the debt before the year or promotional offer comes to an end. These types of offers can be found on vehicles, where you have paid a fair sized down payment and then you can finance the rest free of charge for up to five years.
What about missing payments?
So what will happen if you do not manage to make the final payment or payments before the special 0% deal ends? If you find yourself in this position you end up having to pay the interest on the entire amount that you have borrowed, and this will be enforced even if you have almost paid the entire amount back.
For example, say you purchased goods to the value of £5,000 on a 0% interest and nothing to pay for a year offer. If you spread the payments equally you would need to pay £417 per month in order to pay the amount off, so you need to make sure that you can afford this. If not you may end up having to pay the interest for the entire year even if you have paid £4,999 of it back!
High Rates of Interest
The interest rates charged on these types of deals when you are unable to make the repayments required is usually abnormally high at about 24 – 29%. With rates like this you would actually be far better to make your purchase using a credit card with an interest rate of 10 – 12% for the year (although I wouldn’t suggest you do that). Ideally if you are going to take out a 0% finance deal you will already have the money sitting in your bank earning some interest. Then when it gets to the 11th month if the deal is for a year, pay the entire balance off and this way you will avoid any additional financial charges.
If you find that you do not have the money already in the bank, you are best to make the monthly payments that total the full sale price.
The majority of lenders will not issue statements until the deal has expired and then when you receive the statement you will see that there is a column that details accrued interest and you will see that the amount will go up every month where the balance has not been paid in full. This is an amount that you have to pay the lender in addition to the monthly payment when the promotion has come to an end.
Therefore when your promotional period comes to an end and you have not paid the balance in full, you will accrue interest every month and this is actually a daily rate until you pay the balance in full and there will even be interest on the accrued interest! So really by deferring the payments for a year you technically end up paying even more interest.
Is 0% as good as it sounds?
The key things to look at when considering 0% finance is:
- can you afford to make monthly payments that are equal to the total cost
- can you pay the balance in full before the promotion comes to an end?
It is true that 0% finance promotions do make things appear far more affordable, but they are usually not as good as they seem. If you miss a payment you will be hit with large financial penalties and lenders rarely contact you or send statements until the promotional period is over and it is too late for you to avoid paying some penalty charges. If you are not careful, it is easy to be sucked into 0% finance deals and before you know it you can end up with many 0% offers spread over a number of years that you are tied to making payments against, and if you fail to make these payments your credit rating will be affected, and we all know how important our credit score really is.
It’s best to consider the risks of any deal and always read the small print. Get advice if there are terms that you don’t understand and be clear about charges and penalties if things go wrong. If you are confident of your circumstances and ability to pay then a 0% deal may be beneficial but if not, it could be worth saving and making your current car, sofa, house etc. last a little bit longer to protect both your credit rating and your bank balance.
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