You may have noticed a new option on the checkout page — zero-interest financing. More online retailers are offering to finance large purchases with no interest charges. It sounds too good to be true, but is it?
Adrian found himself asking this question. He’s looking to buy around $10,000 worth of high-end camera gear, including a new body and lens, and the seller is offering 12-month financing at 0% interest. Adrian has been saving for this purchase and has the necessary cash, but is tempted to accept this offer. However, he is concerned that there is a catch — and that accepting the terms could come back to bite him.
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The use of zero-interest financing is on the rise, with nearly half (48%) of Americans stating that a 0% annual percentage rate (APR) option would influence their purchase decisions [1]. Before you use this option, there are a few things you need to know.
Common catches to zero-interest financing
If you have the money to pay off a purchase in full, there may be no harm in using zero-interest financing or buy now, pay later (BNPL). But this financing isn’t without its drawbacks. Here are two potential pitfalls you need to know.
Interest can be retroactive
That 0% financing likely only stays in effect if you pay on time, every time. Missing just one payment can trigger retroactive financing, meaning you’ll be charged interest on the entire purchase, not just on what you have left on the balance. And the interest rates are often extraordinarily high — more than 35% in some cases.
It’s training consumers to spend more
Research from the Harvard Business Review found that BNPL financing leads people to spend more than they intended [2]. Retailers aren’t offering this out of the goodness of their hearts — they anticipate that consumers will spend more. And the financing company is betting that enough consumers will miss a payment to make it worthwhile.
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What to consider before using zero-interest financing
Before you click "agree" on a 0% financing plan, take a step back and run through a quick checklist:
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Did you plan to spend the money anyway? If the purchase was already in your budget and the offer is not influencing you, that’s a good sign.
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Can you pay on time, every time? Missing even one payment could trigger retroactive interest and late fees. Make sure to set reminders or, better yet, enable autopay.
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Do you understand the fine print? Check the repayment schedule and look for hidden fees.
If you’re confident you can stick to the payment schedule and the purchase fits your financial plan, 0% financing can be a useful tool — especially if you keep your cash in a high-yield savings account and earn a little interest while you pay off the balance.
The key is discipline. Zero-interest offers work in your favor only if you follow the rules exactly. Slip up, and what seemed like a free loan can quickly turn into one of the most expensive ways to finance a purchase.
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[1]. Affirm. “Affirm research reveals impact of 0% APR financing ahead of holiday season”
[2]. Harvard Business Review. “How “buy now, pay later” is changing consumer spending”
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.