0% INTEREST – A Blessing or a Curse?

Author: Patrick Blair

0% interest: it’s everywhere these days.  You see it in credit card teaser rates, promotional loans, and auto loans.  You can even count no-interest loans from friends or family members in this category.  Most of us have had a 0%-interest loan at one time or another.

How can banks and corporations make money while giving out 0% loans?  Put simply, global central banks have allowed this by making money extremely cheap.  The largest of which, the Federal Reserve, has lent money to primary banks at near-0% rates for about 7 years (2008 to 2015)!  That’s great, right?  Cheap money for everyone!  Woo-hoo!  Not so fast.

These policies have skewed asset prices and interfered with price discovery, which can cause long-term, structural damage to the global economy.  After using these 0% rates in various forms over the years, I’ve seen that they also have some negative effects on consumers.  Here’s a list of 0%-interest loan blessings and curses.

0%-Interest Loan Blessings:

 Blessing #1: let’s start with the obvious: you pay no interest for the period of time that the loan is at 0%.  Not having to pay interest is much better than having to pay interest.

Blessing #2: is that it can be a chance for you to consolidate debts and gives you time to pay off otherwise costly debt.  Low interest rates are great for debtors and bad for savers.

Blessing #3: many of these 0% or low-interest loans are loss leaders.  Creditors and companies do this to get your business.  Creditors figure that you may not be able to pay off the debt during the 0% period, so you’ll end up paying it at a really high rate after that.  Even if they don’t get you, they’ll ensnare someone else and make their profit.  If you can beat them at their game, you can benefit.

0%-Interest Loan Curses:

Curse #1: debt is still debt.  If you borrow, you still owe and are still under the burden of debt, even if it is at 0% interest for a time.

Curse #2: for products like cars, the 0% or low-interest loan has already been priced into the product.  In other words, the price of the product has been inflated to account for the cheap loan.  So, you’re essentially paying the interest in the purchase price.

Curse #3: you have no financial incentive to pay off 0% quickly.  For someone who is trying to get rid of debt, this dynamic can do a real number on your head.  This comes into play mostly with auto loans.

Curse #4: 0%-interest loans often come with an upfront fee.  This is very common with credit cards.  If you pay 4% upfront, then you pay the equivalent of a year’s worth of interest at 4% in just one day.  That’s not really 0%.

Curse #5: is loss leaders that you can’t beat.  Above, I talked about traps that creditors set for you like 0% for a period of time, then 22% after that.  These types of deals can be risky, especially if you can’t refinance out of the loan before the teaser period expires.

Curse #6: 0%-interest loans encourage you to stay in debt or to go deeper into debt.  These loans trick you into feeling like you should buy things that you don’t need and can’t afford.  This is not only a practical problem, but it’s also a spiritual one.

The wicked borrow and do not repay,
                   but the righteous give generously[.] (Psalm 37:21)

Debt makes us feel trapped.  It limits our options.  It hinders our generosity.  Next time you are in a position to take on a 0%-interest loan, please consider all of its implications.

Handling debt and many other related issues are addressed in my book Faith and Finances. Please see www.faith-finances.com for more blog articles.