Definition of Zero Percent Financing
Zero percent financing means financing that bears no interest. The creditor loans you the money, and you only need to pay the money back within a specific time frame. No additional monthly fees will be charged, and you won't pay back any more than the amount you borrowed. Zero percent financing usually is offered only in specific circumstances and to specific people.
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Instances
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Zero percent financing often is associated with the automobile business, as dealerships try to sell cars to prospective buyers. Car dealers may offer zero percent financing on vehicles that are not selling well or during periods of economic hardship when people are less inclined to make large purchases. Other businesses may adopt zero percent financing to attract buyers of other expensive products, such as furniture or boats.
Qualifiers
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Businesses that offer zero percent financing are not obligated to offer it to every customer. Usually, only clients with an excellent credit rating receive zero percent financing. Typically, clients also must have a certain income, indicating they can afford to make the monthly payments promptly. In essence, the business forgoes the added income provided by interest payments in exchange for the assurance that the financing will be repaid promptly.
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Details
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Zero percent financing usually includes a short time frame for paying back the loan, often within two years or less, according to BCS Alliance. That usually means higher monthly payments. If you cannot make payments on time, the creditor often responds by applying high interest rates -- perhaps higher than for a loan without zero percent financing.
Warnings
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Zero percent financing may be offered only on specific products, which limits your options when shopping. You may not be able to negotiate a lower price when zero financing is involved, and a larger down payment may be required. According to BCS Alliance, unscrupulous businesses may use zero percent financing as a "bait and switch," such as offering one product with zero percent financing to attract buyers, then trying to sell them another product without such attractive financing. In other cases, businesses may increase the price of the merchandise to compensate for some of the money lost through zero percent financing.
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