Friday, July 19, 2013

Which Is Better Low Interest Vs. Zero Financing?

At first glance, a zero-percent interest rate is an attractive offer. Upon further consideration, you may find rules apply to your purchase that will not benefit you financially because of loan or credit requirements. Whether you're taking out a car loan or looking for a new credit card, learn which offer details you should consider to make the best financial decision.

Potential

    A zero-percent interest rate allows you to pay cash for your purchase over a period of time. If you choose a low-interest finance option, you are paying the lender to borrow money for your purchase. One of the downfalls of borrowing money is the interest rate associated with doing so, but if you can meet the guidelines specified in your contract to obtain zero-percent financing, you are borrowing money for free. Instead, you can keep your cash on hand, invested or in a savings account, where it can acquire interest.

Terms

    Check the terms associated with your zero-percent offer to determine if it is obtainable, as a time limit often applies. If you are purchasing a vehicle, the term will not change over the period you're paying. Credit cards, however, may only offer a short term, zero-percent offer. Check the rate that you'll incur after the introductory zero-percent rate offer, and compare the low-interest option, which you may find is consistent throughout the time you maintain the credit card. If you cannot pay back your purchase during the zero-percent offer, you might as well go with a low-interest offer, unless the rate is comparable after the introductory period is up. Also check the term of the low interest offer to ensure it remains the same, and if it will, the low interest offer is probably the better option.

Budget

    Consider your budget and monthly payment. Again, if you cannot pay a credit card purchase off in the specified period, the zero percent offer is probably not worth your time. For a car loan, a zero-percent rate is generally offered for a 36-month loan (some offers may be longer). While this rate is very attractive to a buyer, a short-term loan such as 36 months usually warrants a very high monthly payment. In addition, the short-term, zero-percent offer is also in lieu of any rebates, or automatic discounts off of the vehicle you purchase. A low interest loan car loan is better than zero-percent if the car payment is significantly beyond your budgeted car payment amount.

Rebates

    A vehicle manufacturer might offer thousands off of the car you're purchasing in lieu of zero percent. You can usually choose one or the other, but be careful to do the math beforehand to view the amount you'll pay back over time for each offer using an auto loan calculator, such as the one offered on the Edmunds website. Surprisingly, the overall costs are probably about the same. The zero-percent offer is in fact a rebate offer with a different name, meaning that the manufacturer must "buy down the rate," or pay several thousand in interest payments to eliminate interest charges, which is usually the equivalent to the alternative rebate amount.

Considerations

    If you can take advantage of an automatic vehicle rebate, negotiate the price of the vehicle and obtain low interest financing instead of the zero-percent offer, you'll likely save more money during the pay-back period of your loan. You can usually pay off the vehicle's loan early and not incur any penalty charges. Find out if any penalty charges exist for the loan or credit you wish to borrow, and if none do, you can pay off your loan early to eliminate interest charges.

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