What Does Zero Percent Financing Really Mean?

by Ciele Edwards ; Updated July 27, 2017
Zero percent financing deals are common with automobile dealers.

Zero percent financing is a method of financing that is most often used with automobiles but can occasionally be offered with other purchases such as furniture. Companies use zero percent financing offers to draw in customers and improve sales numbers.

The Facts

Zero percent financing agreements reflect loans on which the lender charges no interest to the borrower. This results in the lender not making a profit on the loan during the period of time that the borrower is paying no interest. For automobile dealerships with in-house financing, however, the profit made on the sale of the vehicle can offset the lack of interest.

Time Frame

Most zero percent financing agreements are only temporary and are used as an introductory rate. After a certain time, the introductory rate will expire and the borrower will be subjected to a higher interest rate.

Features

In the event that zero percent financing is offered for the life of the loan, the payback period on the loan will typically be very short--often around two years. This makes accepting the offer challenging for those who do not have a substantial amount of disposable income.

Considerations

Most advertisements boasting the availability of zero percent financing will stipulate that the offer is only for “well qualified” buyers. This means you must possess an exemplary credit rating to be approved.

Warning

If you opt to take advantage of zero percent financing, read your contract carefully. After the introductory period expires, you will be legally bound to the default interest rate. This interest rate may be much higher than one you could get through another lending institution. High default interest rates can make the purchase more expensive over time than a low interest purchase with no introductory rate.

About the Author

Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.

Photo Credits

  • Image by Flickr.com, courtesy of Daniel Cooper