Zero percent financing or installment loan?
It sounds too tempting: whether it’s television, furniture or even a new car – retailers and manufacturers have been using a very special trick to attract buyers’ favor for some time: with so-called zero percent financing.
For consumers who make an urgent purchase or want to fulfill a long-cherished wish, the free financing sounds very tempting at first: If you can’t pay the purchase price out of savings, you stutter the amount in moderate monthly installments and don’t even pay interest. With these unbeatable advantages, however, many consumers quickly forget that even zero percent financing is associated with disadvantages that a normal installment loan usually compensates for.
Free product choice with zero percent financing is often not available
A very important catch of free financing is that retailers usually link this payment option to certain products – so there is often no free choice of which item should be paid for through zero percent financing. It is different with the financing of a purchase via a normal installment loan. Which lending television model is to be financed by a loan, or whether the red or black sofa is pumped up, usually does not matter for the lending bank when it comes to lending.
In addition, consumers often forget that even with zero percent financing, a loan agreement is concluded with a normal bank – not with the retailer himself. As with taking out a normal installment loan, the bank checks both the creditworthiness and the Credit Bureau file for customers who want zero-percent financing. If a customer does not pass this credit check due to his poor credit rating or a negative entry in the Credit Bureau file, the bank does not provide zero percent financing.
Consumer protection warns of hidden costs of free financing
A big problem with the apparently free dealer financing that consumer protection agencies have long warned about is the additional costs that can be hidden in the small print of the financing contracts. In order to still be able to earn money with the free financing method, some banks require a processing fee for this payment option, the item “other costs” or another fee that quickly turns the zero percent financing into an expensive loan. Such fees are forbidden for normal consumer loans – here the customer really pays the interest rate that the bank shows openly.