What Is Zero Percent?

In finance, the term “zero percent” refers to promotional interest rates used to entice consumers. They are often used by businesses wishing to sell big-ticket items such as cars or home appliances.

Although zero-percent financing might seem attractive, consumers should be aware of any hidden fees embedded in the offer and should ensure that they are able to fully repay the debt once the promotional period has expired.

Key Takeaways

  • Zero percent financing is an incentive offered by retailers who wish to sell products that might otherwise be unaffordable to most consumers.
  • These offers are typically limited to short periods, such as six to twelve months.
  • Customers often underestimate the long-term cost of such purchases, failing to recognize that their interest rate can increase substantially after the promotional period.

How Zero Percent Works

Stores often offer aggressive financing packages to incentivize customers to purchase relatively expensive items. For example, a car dealership might offer zero-percent financing for a certain number of years on its vehicles. Given that most cars are priced at $30,000 or more, this type of low-cost financing might make it possible for customers to buy the car despite not having the cash available to buy it outright otherwise.

It is important to note, however, that these offers may not be as affordable as they seem. After all, zero percent offers typically last for only a limited period of time, such as six months or one year. After the promotional period has ended, any unpaid balance will typically incur a much higher interest rate. If the customer has not managed to repay the debt by that time, they might find themselves surprised by the sudden increase in monthly payments, and may even be forced into default.

Ultimately, stores that offer zero-percent financing are relying on the fact that many customers will have failed to pay off the balance of their purchase by the time the promotional period is over. They, therefore, hope to benefit from the much higher interest rates charged afterward. Similarly, stores will sometimes increase the upfront price of the product before offering it under flexible financing terms. For instance, they might increase the cost of a car by 5% before offering it to customers under a zero percent financing program. In instances such as this, the zero percent interest offer can be misleading.

Real-World Example of Zero Percent

Kyle is shopping for a new TV at a local big-box electronics store. He is pleased to find that many of the high-end models are being offered under very generous financing terms.

One of these models, a $2,500 4K TV, is being offered with zero percent financing for twelve months. Although Kyle had only saved $1,500 toward this purchase, he reasons that there is no harm in purchasing the more expensive TV since he can delay making payments on it for a full year, even without paying interest.

Unfortunately for Kyle, he had failed to adequately read the details of the offer. One year later, he receives his first bill from the electronics store. Because the promotional period has ended, he is now being charged interest at a post-promotional rate of 20%. Unless he quickly pays off the outstanding balance of the TV, he may find that the true cost of the purchase was far greater than he had imagined.

In addition, 0% financing deals often include a provision that will add any deferred interest back into the balance due, if the entire amount is not paid off prior to the end of the promotional period. It pays to read the fine print of any 0% financing offer.