The Myth of Zero Percent Financing

Going behind the numbers shows you might be paying more than you think.

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With unemployment near double digits and our economy a little battered, you might be looking for some relief when it comes to your credit or debt. There are many 0 percent offers out there, from balance transfers to financing on big purchases, that may not be quite as good as they seem on the surface. They aren't bad offers, they're just not as attractive as the headlines seem to make it.

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Today, we'll take a look at a few of these 0 percent deals and the aspects about them that make them not as attractive as we all think.

0 percent Balance Transfers

The allure of a 0 percent balance transfer is obvious. It's in the name. You get 0 percent interest on a balance transfer for 9, 12, or even as many as 18 months. For someone in debt, having a year-long reprieve from interest is very appealing. The problem is the pesky balance transfer fee. A balance transfer fee is a fee, usually 3 to 4 percent, charged whenever you transfer a credit card balance. It's almost always an up front fee and while it's probably better than the purchase APR on your existing credit card, it's certainly not really 0 percent.

Also, if you're considering a 0 percent balance transfer, take a look at the regular rate, after the promotional 0 percent balance transfer rate, before you transfer because that's what you'll be paying if you can't catch up.

0 percent Financing

Whenever you make a big ticket purchase, like a television, an appliance, or a home renovation; the salesperson will almost always try to sell you on their financing. The 0 percent financing offer is ubiquitous but it's only really 0 percent if you're able to pay off the loan before the 0 percent financing period ends. If you don't, many places will charge you interested over that 12 month period. Sound confusing? That's the point!

A few years ago we renovated our home and replaced all of our windows. The project was in the neighborhood of several thousand dollars and it included 11 windows and three sliding doors. The company offered us a 0 percent financing offer for 12 months which we snapped up in a heartbeat. If we paid off the loan in 12 months, we wouldn't pay a penny in interest (that's exactly what we did). If we didn't, we'd be assessed interest on the balance for that entire 12 month "0 percent interest" promotional period! So, the next time you see a 0 percent financing offer, remember that you may pay more than 0 percent if you carry the balance beyond the promotional period.

[Visit the U.S. News Personal Finance site for more insight and money management tips.]

Family & Friend Loans

Sometimes you need a bucks to make it to the next pay period, it happens more and more often in our current economy. When it's only a few hundred dollars, it's not an issue because at those amounts the IRS will not even attempt to enforce it. When it's substantially more than that, Uncle Sam actually requires that the borrower pay an interest rate at or above the Applicable Federal Rates. So that 0 percent loan from your buddy? Technically, you need to be charged a nominal amount of interest. (This, of course, ignores the social cost of a friends & family loan, which can be substantial)

How do they enforce this? I have no idea because technically you could "gift" your friend the amount, as long as it was under the gift tax amount, and then your friend could "gift" it back to you.

As you can see, some 0 percent offers aren't really as 0 percent as they seem on the outside. While some are better than not getting 0 percent, it's very important that you take a very close look at what you're applying for because you don't want to be surprised in 12 months with a much larger bill!

Jim Wang writes about personal finance at When he's not tackling money issues, he's usually look forward to his next vacation and writing about it at Wanderlust Journey.