You see it all of the time — “Buy it now at 0%”!! It is a slogan often used in commercials, articles and on commercials.
These days, the average consumer associates 0% with FREE. But, does a zero interest loan really equate to free? It is my belief that as consumers, we have such a strong desire for great things right now that it clouds our judgment when it comes to deciding if it’s a good idea to purchase a product.
With that said, today, I’d like to discuss the opportunity cost associated with low interest or 0% interest loans as well as a few things that often get forgotten when it comes to them.
Opportunity Cost And 0% Interest
Just because a loan comes with a 0% interest rate does not mean that the loan is free. As a matter of fact, there is a cost associated with any loan, even those that are 0% throughout the life of the loan. It’s called the opportunity cost. When something causes you to loose the opportunity to make money, we call this an opportunity cost. So, why would that $3,000.00, 0% interest television cost you anything?
Well, think of what you can do with the payments that you will be making to pay off that $3,000.00 loan!! Chances are, you have a mortgage or auto loan. Regardless of whether or not you choose to buy the T.V. at 0%, these are loans that charge interest that you will have to pay. Therefore, by allocating extra funds to your mortgage or auto loan, you will save money in interest. However, you will not be able to allocate as much to these loans if you have to pay off a new $3,000.00 loan, even if it is at 0%.
You also have the opportunity to invest the money that you would be using to pay for the T.V. You could do this at a low interest rate through a conventional savings account until you have saved enough to get into the other types of higher yield investments. That T.V. could cost you valuable time in building your investment portfolio!
0% Interest, The Forgotten Facts!
Being so driven by a desire to save, consumers often forget crucial facts about 0% interest rate loans. Here they are…
Some Promotions Come With Other Fees – One of the most common types of 0% interest loans is balance transfer credit cards. However, these cards charge a percentage of the amount being transferred, annual fees and more! Aside from balance transfer credit cards, many other types of 0% interest loans come with similar fees.
0% Rarely Lasts Forever – In most cases, 0% loans come as promotional packages with promotional periods. Generally, these 0% promotional periods will last anywhere from 6 to 18 months. After that, you will be required to pay interest on your loans!
The Final Conclusion
There is no such thing as a free loan. As much as I would love to tell you that 0% means free, the truth is, there is always a cost associated with the loan. Therefore, when you see a 0% promotion, look at other fees, expiration dates and weigh the opportunity cost with the reward to see if it is a good option for you! I hope you’ve enjoyed my article, please come back next Friday for more Friday Finance with Josh!
This article was written by Joshua Rodriguez, proud owner and founder of CNA Finance and avid freelance, personal finance writer. Join the conversation about this article or any personal finance topic of your choice on Google+!