Zero Percent Financing 101

Deferred Interest Vs. Waived Interest

Zero Percent Financing 101
November 11, 2014

Zero percent financing sounds like an excellent deal. It can be, if you truly understand the details of the zero percent financing that you are being offered. Otherwise, it could be an unpleasant financial shock for you, and a lesson in how to read the fine print of an offer.

The biggest differential between zero percent financing programs is in how the interest rate is defined.

Wait a minute, you say…doesn’t zero mean zero? Yes, it does. The real question is when the much higher rate kicks in, and under what circumstances. Zero percent deferred interest is conditional; zero percent waived interest is not.

Zero percent financing is a promotional rate over a limited period of time (one year is a common time frame). After that period, rates rise steeply. Typical rates are in the 20-30% range, similar to credit cards.

With deferred interest, during that zero percent time frame interest is being accumulated at the future rate – you just aren’t being charged for it yet. Waived interest means that interest truly is not accumulated during the zero percent period.

While either type of zero percent financing may be available from any vendor, the waived interest variety usually comes from a longer-term account that is not specific to an individual purchase. Zero percent financing purchases of an individual big-ticket item such as a computer or an appliance usually involve deferred interest.

A credit card company can afford to waive interest for an introductory period because you have committed to the use of the card on a longer-term basis. The vendor of the big-ticket item has no claim on your credit after you have paid off the cost; therefore, it is in their interests to collect interest on that early period.

In the case of deferred interest, you are essentially opening up a credit card account that ceases after the item is paid off. For example, if you have zero percent deferred interest for 12 months with 25% afterward, you will see no interest charges on your bills, but on the 13th month, the collective interest charges from the first twelve months will be added onto your account. Depending on how much of the balance you have paid off, that can result in a sudden increase of several hundred dollars to your balance for every $1,000 of initial purchase price.

The way to take advantage of any zero-percent financing, whether waived or deferred, is never to carry a balance past the zero-percent period.

If you have a deferred interest purchase, simply pay off the entire balance within the zero-percent period. The “accumulated” interest goes away, and you do not have to worry about exorbitant interest charges on any remaining balance. Similarly, pay off any balances on the zero-percent waived interest credit card during the promotional period and it won’t matter what the interest rate is.

The philosophy is similar to managing any credit card – never charge more than you can afford to pay at the end of the period, and it doesn’t matter what the interest rate is on your account. Zero percent financing just stretches that time frame from one-month to the length of the promotional period.

Of course, an even better way to handle these purchases is to not charge anything at all and pay cash, or decline the zero percent financing and pay it off within the month on your normal credit card. Don’t let something that sounds like a sweet deal take you out of proper financial discipline and tempt you to make a purchase that you cannot really afford.

If you want more credit, check out MoneyTips' list of credit card offers.

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