What Is 0 APR Financing?
APR is the acronym for annual percentage rate. Zero APR financing is sometimes made available for car loans, furniture and appliance purchases and credit card balance transfers. Paying zero interest on borrowed money is usually a good benefit, but you should compare any offer against the alternatives and understand the fine print.
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Function
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When you borrow money to buy something, the lender wants to earn interest on the amount you borrowed. If a company selling a product is charging zero percent interest or APR, the lender must be compensated in other ways. To be able to offer zero APR, the product seller must buy down the rate from the lender. The cost to buy down the interest comes from either the seller's profit margin or the seller finding another way to pass the cost along to the customer.
Time Frame
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Zero APR financing options often have a limited repayment period. A car manufacturer offering zero interest loans may limit the term to 36 months and charge interest for loans with a longer term. Furniture and appliance stores may have zero APR or "same as cash" financing offers with time frames as short as 6 or 12 months. All other factors being equal, the longer the term for the zero APR financing, the more interest a borrower can save.
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Calculations
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With zero APR, payment calculations are easy. Simply divide the amount to be borrowed by the term of the repayment period. An $18,000 car loan with a 36-month zero APR loan would have a payment of $18,000 divided by 36 or $500 per month. Calculating interest saving is relatively easy also. To compare, you need a bank or lender to calculate the payment using current interest rates. The $18,000 loan at 7 percent interest would have payments of $555.79 per month. The $55.79 difference is the interest on a regular loan compared to a zero APR loan. Multiply the monthly interest times the 36 payments to calculate the interest savings. In this case the zero APR loan saves the borrower $2,008.44 in interest.
Considerations
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Zero APR loan offers should be compared against other promotions offered by the seller. Auto manufacturers usually give buyers a choice of the low or zero interest rate or a cash rebate. Sellers of other products may offer a discount for paying cash instead of using their zero APR financing offer. Compare the amount of cash rebate or discount to the interest saved by opting for the zero APR plan. Select the option where the net cost is lowest.
Expert Insight
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Smart Money magazine, in a July 2008 article, gives several tips on whether to take the zero APR or the rebate with other financing on a car purchase. The tips include to remember to negotiate for the best price and make sure you can qualify for the low interest loan offer. The article also provides a calculator that will numerically compare the different offers available.
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