Last year when I bought Amanda’s engagement ring they put it on a 0% interest loan even though I was never asked if I wanted the 0% interest deal or if I wanted to pay in full. Even though I wasn’t asked if I wanted the deal, I would have taken it for several reasons: I had enough money in my account to pay for the ring in full, my bank account earns more than 0% so I could keep my money in there during the meantime and earn a little bit instead of earning nothing on Amanda’s finger, and I’m disciplined enough to pay it off in time. The problem with this situation is that as I was speaking about it with someone last week I realized how shady the situation really was.
Often when you go to buy appliances, furniture, jewelry, or other more expensive items such as these that you don’t purchase day-to-day, you’ll be presented with a 0% financing offer. This means that they will allow you to make payments on the item, rather than pay for it in full with cash, without paying interest for (usually) 12 months. However, there are a couple of HUGE things that I was never told that you’ll want to know if you consider one of these financing options. I feel extremely fortunate I already new these details. Otherwise, the situation could have turned out much worse.
Term
The first big thing that I was never made aware of, and had to dig to find on the loan website and within the statement, was that the term of the 0% financing was 12 months. This is very typical of these deals and leads to the next two important pieces of information.
Payment
The minimum payment that I was charged would have not paid off the financing in full within the 12-month time frame. It was as simple as taking the total amount of the loan and dividing it by the appropriate number of months to figure out how much I really needed to pay, but I felt like this number was something that should have been given to me. Not making the proper payment to pay off the loan in time could lead to some hefty consequences.
Deferred Interest Charges
If I had not figured out what payment I needed to make to pay off the loan within 12 months, then I would have been responsible for ALL of the interest that would have been charged to me (this is called the “deferred interest charge”). If you read the fine print on your statement, you’ll find that your 0% financing actually does have an interest rate and it’s probably something ridiculous like 25-30%. This isn’t something I was explicitly made aware of by anyone.
You’re not really paying a 0% interest loan, you really have a 25-30% interest loan where the interest is being deferred contingent on you paying it off in time. If you don’t pay back the loan in full within the specified time frame, then you’ll be responsible for paying all of the interest that you would have been charged otherwise. That can be pretty salty if you don’t understand those terms going into it.
Your Situation May Be Different
Could I have paid for the ring in full at the time of purchase? Yes. Did I make very much money by keeping my money in my savings account instead of paying the loan in full during the first payment of the financing? No, but I had better peace of mind keeping my money in the account. Some people are so averse to debt that they would have rather paid it off immediately and that’s totally fine. There wasn’t a huge benefit to me to not paying it off and I knew it would be paid in full no matter what before the financing terms were over.
Some people would rather pay in full, some people would rather take the financing, and a lot of people would have no idea of the specific terms of the financing deal and how harmful it could potentially end up being to their personal financial situation if not handled correctly. As always, it’s so important to be aware of your own financial situation and never take generalities as advice.
