Money Management

The “0% Interest” Dilemma: Is it a Good Deal?

Lately more and more retailers have begun offering 0% interest financing deals on everything from electronics to theme park passes. On the one hand these offers are a step up from other forms of financing such as credit cards that charge steep interest rates for the convenience of monthly payments. On the other hand, these monthly payment plans could serve to distract you from the actual cost of what you’re purchasing and whether it’s really worth it.

One of the most popular examples of this practice in today’s world is buying a new smartphone. Back in the day wireless carriers offered significant discounts on phones when customers signed up for a two-year service agreement. Somewhere down the road these carriers began experimenting with offering 0% financing deals on these phones allowing users to upgrade every year or two years, while paying off the phone in monthly installments. The catch? Customers are paying two to three times as much since these deals were built around the full retail price.

Unfortunately, due to the popularity of these monthly plans no major carrier in the U.S. still offers service contract subsidizing.  This means that your only options are to pay full retail price up front or choose a 0% interest financing program. So which is better?

Simply stated either is perfectly acceptable provided that you actually need to a new phone (or whatever other item is being sold with 0% financing). The problem is that many consumers may be tempted to purchase items they don’t need simply because paying $20 a month for two years sounds cheaper than plunking down $480 all at once. What it comes down to is do you really need a new smartphone every year? If not it may be better to buy the item upfront and use it until it needs replacing. Similarly, if it’s not something you’d be willing to pay for in a lump sum, it’s likely not worth purchasing at all.

Another industry known to throw around 0% financing every so often is the auto industry. If you’re in the market for a new car (or new to you at least) jumping on an interest-free loan offer could make a lot of sense. Just keep in mind that, in order to take advantage of these offers, you’ll have to have impeccable credit. Additionally your choices of vehicles may be limited and your negotiating leverage is decreased in these situations. As always, if you can pay cash for a car, do it.

Making a big purchase is supposed to sting. That way you can decide whether a purchase is an absolute “need” or just a “want.” Monthly payment plans, even when they offer 0% interest, help relieve this sting and thus make it easier to buy things you don’t truly need. Don’t let these seemingly good deals sway your value evaluation skills and make sure you’re making sound purchasing decisions overall.

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