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How 0% Financing on Home Improvement Loans Work

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Back in June, I penned an article where I warned that consumers should be wary of 0% financing offers. I wrote that post because oftentimes (I would almost go as far as saying always but universal statements always come back to haunt you) deferred interest continues to accrue even though the loan balance doesn’t change. Well, my same as cash loan (for my windows and sliding door replacements) paperwork just came in, financed by GE Money Bank, and it’s just as I expected. I have $0 in monthly payments for six months but deferred finance charges continue to accrue at an annual percentage rate of 18.24%. If I don’t pay off my home improvement loan before the promotional period, I’ll have to pay $2,944.30 in deferred interest. Windows and doors that I purchased for $7,000 (great deal!) would actually be $9,944.30 (ho-hum deal!).

This same paradigm applies for any 0% promotional financing offer out there – so unless you’re able to pay off the full price before the promotional period (or you can secure better rates), you’re better off not taking the promotional offer because of its awful rate (18.24%!). If you have the cash on hand, you can stick that money into a high yield savings account and treat it like a 6 month balance transfer.

{ 5 comments, please add your thoughts now! }

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5 Responses to “How 0% Financing on Home Improvement Loans Work”

  1. Right on. The companies that offer the 0% financing have done studies and discovered the majority of people that sign up for these offers don’t pay off the balance once the promotional period ends.

    Basically, they’re using money psychology on us. Entice us to buy with the great offer, knowing we’ll end up paying them all the money in the end. However, if you’re smart about it like jim you can get an interest free loan for a few months. I bet if enough people caught on, those 0% financing offers would dry up pretty quick.

  2. Mike says:

    I would argue it’s not so much being smart as being organized and disciplined (not to say Jim isn’t smart). I think most people who take these kinds of deals have every intention of paying them off before the due date, and have the money available (or at least reasonable certainty that the money will be there when the time comes).

    I think where most people fall down is simply paying attention to the statements, due dates, etc. and sending in that full payoff amount so that it arrives and is processed before the magic date. In my experience they usually send you monthly statements with zero due every month, and after 6 or 12 of those I think a lot of people are lulled into not really thinking the statements are important, and the due date on those statements are usually buried in fine print. They certainly don’t warn you when the date is approaching.

    In order to avoid the massive charges and penalties, you need your own reliable system to make sure you know when the date is approaching and you make the payment well in advance of that date.

    In my case my bank can schedule bill payments well in advance, and can pay anyone (mailing a cashier’s check if the bank has no payment agreement in place with the merchant). If I do a 6 months same-as-cash deal, I can go home that same day (or more likely when I receive my first statement, which has the payment instructions) and schedule my bank to send a payment 5 months and 2 weeks later (to allow for mail delays or other screwups). As a backup, I can put a reminder in my PDA for around the same date so that I can verify it all went through as planned.

    It still requires me to be organized and take action, but for me it’s easier to do it the first time, and then if I end up ignoring the statements, I’m covered.

  3. Kara says:

    You have to watch the start and end dates of these offers carefully – in addition to statement due dates. I purchased some electronics items using a 0% interest deal and paid the balance off by the statement due date, but was charged interest on the amount of the last payment (I had made equal payments over the time period rather than paying the entire thing at the end thank goodness). Because I had paid by the statement due date and not the offer end date (a difference of three days), I paid interest of the remaining balance at 22.94%. Luckily, the last payment due was small, but still a painful reminder of how careful and, as Mike so well noted, organized, once must be when playing the 0% interest game.

    One thing I will note is that with car loans through GM at least, the 0% interest deal is a good one – assuming you make your payments on time. I’ve purchased my last two cars on the 0% interest offer available at the time and purchased my cars with no penalty. The most recent vehicle even included the financing for the extended warranty and a rust proofing plan in the 0%. I’ve been really pleased with both car loans and GMAC’s service on the loan has been excellent. I even made a late payment once and was not charged any fee (it was three days late). Their policy states they can charge a hefty fee, but they took it off when I called and explained what had happened (a foul up with electronic checking through my bank – but which was my fault).

  4. Mike says:

    Does anyone have statistics on what percentage of Same as Cash loans are paid off timely?

  5. dorn says:

    Try using your on-line bill pay feature of your checking account to schedule the full-payoff payment for a week or so before the promotional period ends. You can usually do this as soon as you get the first statement since then you know the account number and payment address. My bank lets me schedule payments like a year in advance, so I don’t have to worry about it…

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