pitfallsSeveral pitfalls of no interest loans go unnoticed by consumers. It is important to keep in mind that not all no interest loans are a bad thing. If you need cash for bills, personal reasons or an emergency these loans can help to get you what you need. After the situation is taken care of it’s time to start budgeting to repay the loan on the agreed upon terms. Defaulting on these loans can cause absolute financial ruin.

 

Deferred Payment Loans

Deferred payment loans seem great up front. You go to a store and get something that you need or obtain funding to save your home, as examples. This gets you out of the bind quickly but repayment is another thing. Although there were no payments for several months, or even a year, what you will be paying when it is time to begin repayment, the payments are going to be much higher.

This type of loan is usually seen on flooring, furniture and some car loans. There may not be any interest, but retailers can sneak in other fees such as administrative fees, and the terms of the loan have other assessment fees that make up for not having to pay interest. These fees can be just as much as or more than what the interest on the loan would have been.  Often times it might be best to look into installment loans that lock in lower rates.

 

Paying More in the End

Essentially, with most no interest loans, you end up paying more for the product. Merchants are able to take bills of sale to creditors to use as collateral to obtain loans to pay employees, merchandise receipts and other expenses. You’re paying the retailer, essentially, to pay their own loan if you really think about it.

 

Ask About “As Same as Cash” Payment Options

This might be an option with some retailers. If there are no payments for three months, ask about a 90 days same as cash situation which would allow you to pay the balance within 90 days. This one-time payment would then pay off the purchase at one time.

What this all boils down to is that in the end, you’re going to pay more for items when you work on an installment plan or loan type of situation. It is better to pay in full for items whenever possible. It may seem like a good deal at the time to get that new sofa with no payments for months, but you have to look at how much more you’re paying beyond the price tag.

About Robert Farrington

Robert Farrington has written 77 articles on this site..

Robert Farrington is the founder and editor of The College Investor, a personal finance site dedicated to young adult and college student finances.

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