Should You Take 0% Financing On Purchases?
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These days it seems like every purchase, big or small, comes with an offer of 0% financing, allowing you to pay off the item over time without any interest charge.
Over 80% of auto sales in the US are financed,[1] and at least 9% of all e-commerce transactions use some form of financing.[2] For example, if you buy on Amazon using an Amazon credit card (and many others), you’ll usually receive a 0% financing offer with payment due in six months.
At first glance, 0% financing seems like free money. But there are several things to consider before taking one of these offers.
First, assuming you can afford the item, the main benefit of zero-percent financing is the “time value” of the money that you get to keep rather than paying it upfront. For example, if you buy a $1,800 kayak with zero-percent financing with the balance due in 12 months, you will have that additional cash for now, and can invest or keep that money in savings. If the current “risk-free” rate of return (what you can earn in a savings account, or owning short-term government bonds) is about 1%, you can earn about $18 over the course of the year, before taxes, without taking on more investment risk. With rates this low, it’s difficult to justify taking the financing based solely on this benefit.[3]
And there are some major drawbacks:
Having a payment plan means additional paperwork and making sure the company receives your payments.
In addition, if you would have otherwise paid for the purchase with a rewards credit card (e.g., a 2% rewards card) you may be forgoing the rewards if you must pay off the 0% financing from your bank account.
Even worse, taking too many 0% financing offers could harm your credit score by increasing your number of accounts and credit utilization rate (though many offers are not reported to credit agencies as long as you make timely payments).
Of course, I haven’t mentioned a key benefit of zero percent financing: the ability to buy something you can’t afford up front. But if that’s your situation, is it really a good idea? Be careful when considering these offers, and when in doubt, steer clear.
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I hope this has been helpful. If you liked it, please share it on social media! Also, please send me your feedback, requests, and success stories.
[1] Per Statista
[2] Source
[3] An exception might be especially large-ticket purchases like cars, where 0% financing on a five-figure purchase could be lucrative. But these offers have mostly dried up. Instead, we have purchased mid-priced cars that we could afford from savings, and tried to put as much as possible on our rewards credit cards (the dealers we have used have let us put up to $5000 each on as many credit cards as we have). But for those purchasing a more expensive car or without enough savings, financing or lease may be necessary and is why >80% of US car sales come with some form of financing.