What Does Zero Percent Financing Really Mean?

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Zero percent financing is a method of financing that is most often used with automobiles but can occasionally be offered with other purchases such as furniture. Companies use zero percent financing offers to draw in customers and improve sales numbers.

The Facts

  • Zero percent financing agreements reflect loans on which the lender charges no interest to the borrower. This results in the lender not making a profit on the loan during the period of time that the borrower is paying no interest. For automobile dealerships with in-house financing, however, the profit made on the sale of the vehicle can offset the lack of interest.

Time Frame

  • Most zero percent financing agreements are only temporary and are used as an introductory rate. After a certain time, the introductory rate will expire and the borrower will be subjected to a higher interest rate.

Features

  • In the event that zero percent financing is offered for the life of the loan, the payback period on the loan will typically be very short--often around two years. This makes accepting the offer challenging for those who do not have a substantial amount of disposable income.

Considerations

  • Most advertisements boasting the availability of zero percent financing will stipulate that the offer is only for "well qualified" buyers. This means you must possess an exemplary credit rating to be approved.

Warning

  • If you opt to take advantage of zero percent financing, read your contract carefully. After the introductory period expires, you will be legally bound to the default interest rate. This interest rate may be much higher than one you could get through another lending institution. High default interest rates can make the purchase more expensive over time than a low interest purchase with no introductory rate.

References

  • Photo Credit Image by Flickr.com, courtesy of Daniel Cooper
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