The Truth behind no Interest Loans

Recently the auto industry has been touting interest free loans on a number of their models. Other industries, in an effort to boost sales, have been doing this for years. Appliances, carpeting, electronic equipment, and the list goes on. Offering payments with no interest sounds like a great deal. So how come I think it needs to be addressed in this article?

If you’re serious about financial freedom and debt elimination, anything purchased with more than one payment will defeat the purpose. One question I have people ask themselves before any major purchase, is,

“Would you buy it that way if you were wealthy?” The answer often determines whether or not you are making a good buying decision.

However, in this case, a wealthy person might answer yes when considering a no interest payment plan. Does that make it okay for everyone? Not really. You see the wealthy person has one thing that makes this a sensible decision. They have the entire amount of money in the bank or other investment vehicle. They could pay for it in full but would actually come out ahead by leaving their money in the investment and making regular payments.

One thing they might do is to set up a specific account with the total amount of the purchase in it. Then they can use automatic withdrawals to make the monthly payments. At the end of the loan they would have the car free and clear as well as any interest earned while in that particular account. All of this is possible because the decision to buy a new car was made first and then the method of payment that benefited the buyer was chosen.

In many cases, customers of these no interest loans made the buying decision because of the “deal” rather than to fill a true need. If the money for the purchase isn’t already in an account, a new debt is created which prolongs the time it will take to achieve real financial freedom.

The other aspect of this situation that should be a concern is creating the payment. People who understand wealth and have achieved it are not concerned at all. They already have the money in the bank and can pay the loan in full at any time. Those of you who simply bought into this “good deal” are challenged each month to come up with a substantial payment.

Most no interest loans are for a shorter term than most people are used to. The loans are for an average of 36 months. That means, in order to calculate your payments, you simply divide the total you want to borrow by 36. For example, if you wanted to take out a $20,000 loan under these terms your payment would be $555.56 per month for 36 months.

I would suggest that if you feel you can afford an extra $555 per month that instead of tying yourself to a car for the next three years that you accelerate your debt reduction instead. Throw that $555 at all of your balances while you make the regular payments and watch how quickly your financial picture changes. Three years is not a very long time but the results could change your life.

If you find that something in your life needs replacing, and you have the money to do it, then look for ways to make the purchase that best benefits you. If that means a deferred payment, a no interest loan, or simply just paying for it up front, you are in control. As you journey toward financial independence, the feeling of being in control of your financial future is really hard to beat.

Lastly, if you feel that low interest from your bank accounts makes this type of financing more attractive, consider this. If you withdraw money that is earning less than 2% interest and pay off a credit card that is charging 12% and up, you are in effect earning 12% on your money. And, you’ll be able to replace that money quickly by using the minimum payment you were making on the card.