Is 0% APR Financing a Trap?

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Interest-free financing can be a great tool — but read this before borrowing at 0% APR. 

We’ve all seen the signs at retailers, advertising things like “no interest until 2025” or “0% APR financing for 12 months.” Some of these offers might sound too good to be true, so here’s a rundown of the types of interest-free financing you might see, the advantages of each, and how they can potentially become a financial trap if you’re not careful.

Several forms of 0% APR financing

Consumers might see several different versions of 0% financing deals. Here are three of the most common types, and some of the pros and cons of each.

0% intro APR

Many credit cards offer 0% introductory APRs as a welcome bonus for new members, usually for a period from nine to 18 months, and on purchases as well as balance transfers. These can be an excellent tool if you have existing high-interest debt, or if you want to finance a purchase that you’ll be able to pay off before the introductory period expires.

Having said that, these deals can be a trap if used to buy things you can’t afford simply because you don’t have to pay interest and the minimum payments are low. Plus, with these deals, keep in mind that your interest rate will switch back to your standard rate as soon as the introductory period expires.

Deferred-interest financing

This is a type of 0% APR financing that can be a serious trap if used incorrectly. The reason is that these deals aren’t technically 0% APR financing at all, but simply defer all of the accumulated interest on the account.

For example, you might see something to the effect of “no interest if paid in full within 24 months.” What the fine print likely says is if you don’t pay the entire balance within 24 months, your 25th bill will reflect all of the interest you would have paid the entire time and is usually based on a relatively high interest rate, often in the 30% range.

I had a college roommate who learned about this trap the hard way. He financed a $2,000 TV using deferred-interest financing with 24 months to pay the balance off. The problem was the required payments weren’t designed to pay the entire balance in time. By the end of 24 months, he had paid back all but $300. However, because there was still a balance, he got hit with about $800 worth of deferred interest charges.

Buy now, pay later

Buy now, pay later, also known as BNPL financing, is a relatively new trend. Offered by companies like Affirm, Afterpay, and others, BNPL allows customers to spread their purchase over a certain number of payments, often with no interest. If you’ve ever seen the ads for interest-free financing for a Peloton bike, that’s a form of BNPL, as are the checkout buttons that are appearing on most e-commerce websites these days that say things like “spread this purchase over four monthly payments.”

BNPL can certainly be a trap if used improperly. For one thing, it’s easy to get in over your head with required monthly payments if you tap the BNPL button every time you shop online. And second, many of these services charge steep penalties and have interest that kicks in if you’re late with a payment.

Key takeaways

There are a few important points to keep in mind after reading this:

0% APR financing can be a great financial tool if used properly. If you use a cash back credit card that has a 0% intro APR, you can actually make money by financing purchases this way. Even deferred-interest deals can be smart ways to pay for large purchases in certain situations.Be sure you know what you’re getting into. Are you using true 0% APR financing or a deferred-interest financing deal? Are there fees involved (common with 0% APR balance transfers, for example)? What happens if you miss a payment?Spend within your means. The biggest reason 0% APR financing can be a trap is when people use it to buy things they otherwise wouldn’t. If you buy things you need and can afford with 0% financing, it can be a smart decision, but if you use 0% APR financing to overspend, it can be a quick way to get into trouble.

The bottom line is that like most financial tools, 0% APR financing can be a trap, but it doesn’t have to be. When used responsibly, it can save you money and make it easier to manage your debts. But if abused, 0% APR financing can lead to serious money problems.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Affirm. The Motley Fool has a disclosure policy.

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