What are 0 interest loans and how do they work?
0 interest loans are loans which are offered by banks, manufacturers and retailers where a loan is being provided to a customer at cost. This means that there Is no interest taken on the principal for the duration of the loan.
Manufacturers and Banks use these loans so that they can offer quality products to customers at affordable rates. This helps them gain a larger share in the market as well as gives customers more accessible entry points for their products. This is a handy tool to encourage spending among customers, and everyone is very happy. In an ideal situation, if the customer repays the loan regularly and on time, then 0 interest loans are a win-win for everyone.
Typically, 0 interest are given to customers who have very low credit scores. They target people with low financial literacy and then expect these people to stick to a strict repayment schedule.
It is recommended that you only take a pre-approved loan if you have a good credit score. This is because, in order to pay off your loans in time, customers need to have the right habits developed. 0 interest loans are great if you can make payments on schedule. In case there is a situation where a customer makes even a single late payment, the penalties are pretty strict.
Sometimes, if the customer defaults on a payment, they can end up paying more for a 0 interest loan than a personal loan.
How Do Lenders and Manufacturers Make Money on 0 Interest Loans
Just because a bank says that a loan is 0 interest doesn’t mean that it always is. There are plenty of ways that banks and lenders can work in the costing of your 0 interest loan into the price of the product itself. Here are three ways that lenders and sellers make money on a 0 interest loan.
Some banks work out discounts with sellers and manufacturers and inventory holders before the products go out to market. Therefore the banks add the interest charged in the loan to match the original selling price.
For example, say you choose to buy a phone on a 0 interest loan for 200 pounds. The exact APR for a similar kind of loan is 10% per year. If the bank was to offer you the phone at a 0 interest loan at 200 pounds, this means that they would have bought the phone at a price of 180 pounds.
This kind of discounts is worked out with manufacturers after years of understanding. They are offered so that customers are encouraged to get the product they desire for a lower price.
Hidden Charges and High Processing Charges
A second way that banks make money on 0 interest loans is through hidden fees and high processing charges. Sometimes banks have charges for application forms. All of these hidden charges actually add a significant amount to the loan.
High Penalty Charges
0 interest loans are one of the most no-nonsense loans that banks have to offer. 0 interest loans work out only if customers follow up monthly with the minimum payments and clear the loan in time.
If however you default on a single payment or make a late payment then you will be forced to make a late payment penalty as well as pay interest on the loan. Most of these loans, once you default on them, have very high-interest rates so you will be paying through your nose for them.
What are The Advantages of 0 Interest Loans
Cheaper than personal loans
Assuming you follow the repayment structure to the ‘T’, 0 interest loans are less expensive than personal loans. They give money to people who are in dire need of cash and helps them gain some financial bearing.
Easier to get than other forms of loans
There have been some instances of no-interest loans being released in less than 24 hours. Banks love giving out these kinds of loans and as a result, just about anyone can access them.
Fewer requirements than other loans
In order to get a personal loan, there is generally a rigorous process that is followed. A thorough credit check is done on the customer, and all the necessary documents are collected for processing. When it comes to a 0 interest loan, however, money is handed out more freely
It is an unsecured loan
One of the most significant advantages of 0 interest loans is that they are generally unsecured loans. This means that you will not have to put up collateral for the bank to seize in case you default on the loan.
Disadvantages of 0 interest loans
They are incredibly expensive
The penalty behind 0 interest loans is retroactive interest charges. This means that in case you miss a single loan repayment, then you will be charged the entire interest of the loan; right from day one. The interest rate set for retroactive interest payments is much higher than the interest offered on for personal loans. This means that they can get costly if you default.
It is easy to overspend and miss a payment
Easy money has no value. In spite of how many times people tell themselves that they won’t miss a payment, it tends to happen. Because 0 interest loans come at no immediate cost to the borrower, he/she tends to spend beyond their means. Finally, when the end of the tenure comes, the inevitable happens.
There are significant hidden charges
One of the biggest problems with 0 interest loans is that customers need to read the fine print very carefully. 0 interest loans might paint themselves as free and cheap. Still, if you’re not careful, even a single misstep will cause you to pay heavily. In addition to this, banks also add extra charges for processing applications and credit checks. All of these have a bearing on the final cost of your loan.