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Retailers are offering more and more 0% financing offers this holiday season on such big ticket items as plasma TVs, computers, digital cameras and large household appliances - sometimes for as long as 24 months. These offers are enticing to consumers for a couple of reasons: for those on low incomes who would need to finance the purchase anyway, it instantly makes the purchase cheaper and for those that do have the money, why not take the free financing and keep the money in the bank to earn a bit more interest.
The problem is that many people who opt for the 0% financing opt to upgrade and spend more on the item than they had planned or budgeted for it. The other is that even though they have the best intentions to pay off the item before the 0% offer expires, they often don't follow through and end up with a balance that has an interest rate at 20% or more.
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The financing companies know that this will happen. They aren't offering the 0% incentive because they are nice, but because they know that it will earn them a lot of money. They have models that can predict how many will pay off the loan on time and how many will end up not doing so and begin paying double digit interest on the loan. It doesn't take many for the offer to become quite profitable for them.
If you do decide to take advantage of one of these offers this season, make sure not to fall into the 0% financing traps. Stick with what you originally planned to purchase and don't upgrade due to the free financing. If you have the money already, stick it in an online bank and don't use it for other expenses so that it is there when the 0% financing expires. If you don't have the money, divide the number of months by the price of the item you purchased and make sure to set aside this amount from your budget so that you have the full amount to pay off the purchase when the 0% offer expires.
Much like credit cards, these 0% offers can be used to your advantage as long as you take care and make sure that you pay off the purchase in time. If not, you'll find that your purchase wasn't near the deal that you thought it was and may cost you hundreds more than you ever expected.
The problem is that many people who opt for the 0% financing opt to upgrade and spend more on the item than they had planned or budgeted for it. The other is that even though they have the best intentions to pay off the item before the 0% offer expires, they often don't follow through and end up with a balance that has an interest rate at 20% or more.
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The financing companies know that this will happen. They aren't offering the 0% incentive because they are nice, but because they know that it will earn them a lot of money. They have models that can predict how many will pay off the loan on time and how many will end up not doing so and begin paying double digit interest on the loan. It doesn't take many for the offer to become quite profitable for them.
If you do decide to take advantage of one of these offers this season, make sure not to fall into the 0% financing traps. Stick with what you originally planned to purchase and don't upgrade due to the free financing. If you have the money already, stick it in an online bank and don't use it for other expenses so that it is there when the 0% financing expires. If you don't have the money, divide the number of months by the price of the item you purchased and make sure to set aside this amount from your budget so that you have the full amount to pay off the purchase when the 0% offer expires.
Much like credit cards, these 0% offers can be used to your advantage as long as you take care and make sure that you pay off the purchase in time. If not, you'll find that your purchase wasn't near the deal that you thought it was and may cost you hundreds more than you ever expected.
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