Imagine, if you will, that you are shopping at the store with your friends and you see a big ticket HDTV that you really want. You are short on cash because you have not gotten paid yet, but they offer 12 month financing at zero interest. Sounds tempting, doesn’t it? You can pay this off in a year. Not so fast. Coastal Equities explains how the zero interest sham works so you don’t fall prey.
The Zero Interest Bait
The zero interest bait works like this. Most consumers won’t pay off the balance in the year. The interest starts accruing from day one. After 12 months, they charge you compound interest for the entire year. So if you have $1 left unpaid after 12 months, guess what… you get hit with interest for each month, for the whole balance that was originally financed.
Now when you are aware the average consumer will never pay the balance off in 12 months, you can see why banks are so happy to lend it to you. It’s because they know that they will make money on interest and are getting you to bite on what seems like a “good deal.”
This is not to say that there are not responsible buyers out there who can get it paid off, and that you might be one of them. But if you take a look at what the actual numbers show, banks offer these “deals” for a reason. Banks are businesses and are in it to earmark profits.
An old time saying entirely rings true here: Generally what is too good to be true usually is. Bear that in mind next time you are tempted by a zero interest financing offer.