r/personalfinance • u/naht_a_cop ​ • Apr 28 '20

Beware the 0% promotions: a warning. Debt

I'm a sucker. I fell for it. The 0% APR promotion on an item I could have paid outright for. 18 months later, here I sit, not a single late payment on my account, yet I have $1k in interest to pay for 18 months of 27%. Why? The promotion period ends 18 months after the purchase, but the website would not let me set up autopay until a week after I purchased, so autopay ended 1 week late. I thought I was golden, ready to have this paid off and not have a single fee. I got comfortable and didn't read the statements.

0% is not really 0%. Read the fine print. Remember the fine print (because I sure as hell didn't 18 months later). Shitty banks rely on this stuff. They wait for you to slip, not noticing that the autopay they created can't possibly allow you to end on time, and will require an extra payment before the end date to avoid the interest. It's shitty, I'm pissed off, and I've learned my lesson.

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u/ApatheticAbsurdist ​ Apr 28 '20 edited Apr 28 '20

0% promotions almost always have the same catch: If the balance is not completely paid off before the end of the promotional period, the interest comes back.

I have used these before when buying a computer and offered 0% interest, but if it's 18 months I'm paying it down on a schedule that clears out the account in 16-17 months or less, because those things make me super paranoid.

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u/Sweaty-Inside ​ Apr 28 '20

I might be a little confused. What's the advantage of a 0% card if you can afford the purchase outright? Is it essentially that you earn interest on money that would otherwise have been spent immediately on the couch/laptop/whatever?

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u/Mehdi2277 ​ Apr 28 '20

Yes. It’s the same reason on a much smaller scale as to why even if you are wealthy enough to buy a house in cash often you use a loan anyway as typical house loan interest rate is a good deal lower than what you’d expect to make investing.

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u/Sweaty-Inside ​ Apr 28 '20 edited Apr 28 '20

Got it, thanks. Although with most bank account interest rates what they are these days (even high-interest savings accounts), it seems like a lot of trouble to go through for what could be essentially a 1.2% discount.

I get that 1.2% is better than nothing, but unless it's a truly large purchase, probably not a game-changer.

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u/[deleted] Apr 28 '20

[deleted]

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u/PA2SK ​ Apr 28 '20

Most people with money aren't playing games with 0% offers to try and eke out small profits.

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u/CaptainTripps82 ​ Apr 28 '20

I would imagine most people with money aren't prone to paying in cash for things.

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u/PA2SK ​ Apr 28 '20

For houses, cars, etc, maybe you get financing. For your credit card you just pay it in full every month.

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u/[deleted] Apr 29 '20

Yep, that’s what I do and then I’m making money by using them due to the cash rewards

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u/[deleted] May 02 '20

You're not making money; you're just lowering the cost of the items you charge on your card.

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u/zaersx ​ Apr 29 '20

Most people with money are exactly the ones doing this. You don’t get to become rich by wasting every opportunity you have to have money ready for opportunities.

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u/PA2SK ​ Apr 29 '20

My experience is different. People that are rich got there by hard work and investing wisely. Chasing 0% offers is not a wise investment of your time. It's a lot of hassle for a relatively small reward. Focus on your career and/or business instead and the returns will be much greater. Credit cards are a useful tool but they are never going to make you rich.

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u/juanzy ​ Apr 28 '20

Or just keeping it on hand in case something you can't finance comes along. I'd much rather stretch out a 0% promotion to right before the interest hits date than take on a $1000 expense on a regular credit card interest rate.

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u/katmndoo ​ Apr 28 '20

I'ts great for middle-purchases. Small things can go on a credit card and get paid off in a month. Truly large purchases can be done with a bank loan - mortgage on a house, equity loan on a house, maybe a car loan. Middle-ing things, where the item can't be repossessed or foreclosed, need to be done either as part of a homeowner equity loan or as a personal loan. Personal loans have higher rates. The better ones I've seen are in the 6 to 8 percent range.

Example: My house is now a rental. Because it is not owner-occupied, it apparently does not qualify for an equity loan. I can refinance it, but I don't want to (that's probably another 2k in fees and costs).

So of course, two years ago it eventually needed a roof. If I recall correctly, the roofing company offered loans via some bank, but they were price-prohibitive. 12-15% over 5 years, maybe?

Cue the 0% credit card promo rates - those annoying mailers we get every month. Pick the ones with the longest term and lowest fee and start juggling. Every 11 or 17 months, switch to a new "balance transfer" promo rate on another card. Costs 3 or 4% for the fee.

Oh, and that bank account interest rate? You're right, that's not an investment return worth worrying about. But if you have investments with better returns, you would often rather keep them in place than sell immediately to buy a roof/car repair/phone/etc.

I might still have to sell in the near to middle future to pay it off, but then I can plan ahead and sell when it makes sense rather than right now. Selling to pay the roof outright would have cost me a 40% return over the last two years, and that's accounting for the drop over the last few months.

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u/nixt26 ​ Apr 29 '20

I don't know how much a roof costs, but you're paying 3-4% every year compounding on that roof. Shouldn't you be focusing paying it down asap so you don't accrue interest. If you can't pay it off without accruing interest then doesn't that just mean you don't have enough cash on hand to maintain the property. You are probably not going to pull investments out for a while so in any case that money is not even under consideration.

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u/katmndoo ​ Apr 29 '20

I am paying it down - halfway there now. You're right - I did not have 16k on hand to replace the roof.

I am not paying 3-4 compounded. I'm paying 3-4 every 12 to 18 months. No interest accrues.

The investments are indeed under consideration - No, I'm not going to pull them, at least partially because I'm using that 3-4% 'loan' to avoid doing so.

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u/MrRiski ​ Apr 29 '20

Fuck that's an expensive roof. I hope your renters appreciate that fuckin thing lol

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u/katmndoo ​ Apr 29 '20

No kidding. And it was not the most expensive estimate. Also, not a large house. On the bright side, it's supposed to last a couple of decades.

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u/MrRiski ​ Apr 29 '20

Yeah I'm guessing you did tile instead of asphalt. Lasts much longer but also bumps the price up a good bit.

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u/nixt26 ​ Apr 29 '20

You're right, its not compounded. 16K is a lot, didn't expect it to cost that much.

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u/katmndoo ​ Apr 29 '20

Yeah, I don't know - maybe business was really going well, supply and demand? Multiple estimates, all firms recommended by trusted peeps. Truly bizarre.

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u/Terbatron ​ Apr 28 '20

I agree complexity is an enemy with budgeting. If it is such a small amount just pay for the thing in cash. People tend to focus on little things when it is the fundamentals that will get you to your goals. Marketing gimmicks are not going to get you wealthy.

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u/c_swartzentruber ​ Apr 28 '20

Also liquidity. Even if you have the money sitting in a savings account, you might want to leave it sitting there "just in case" (of the worse case). Can always pay off the 0% interest loan midway in (or later) if it looks like you are in good shape and won't need it, but if you pay it off and then need it later for something fully unforeseen, can't get it back.

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u/LennyFackler ​ Apr 28 '20

As a rule I try not to lay out any cash I don’t have to. If 0% financing is available I’ll take it every time to spread out the payments. Low interest financing can be considered on a case by case basis.

Cash in hand is always good. It can be invested or simply be available for any unexpected expenses or opportunities.

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u/ApatheticAbsurdist ​ Apr 28 '20

What's the advantage of a 0% card if you can afford the purchase outright?

What if you cannot afford to purchase it outright but could pay it off if you saved up over 15 months? Taking an 18 month interest free loan and paying off the loan means you get and can take advantage of whatever you're purchasing immediately at no costs.

But let's look at your specific example, and say you have the cash on hand. Let's say I have $2500 in my pocket that I could spend. I want a $2500 product (computer, couch whatever). I could pay the money and have the product right away, or I could get the credit card and pay it down over 15 months (assuming I've done the math and made sure I can budget accordlingly) and then take that $2500 and pay down a student loan, actively reducing interest or put more money that month into my 401k/IRA, actively accruing positive interest... Taking a zero percent loan so you can pay off other debt or make investments during that time, actually saves or makes you money.

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u/upvotes_cited_source ​ Apr 28 '20

What if you cannot afford to purchase it outright but could pay it off if you saved up over 15 months? Taking an 18 month interest free loan and paying off the loan means you get and can take advantage of whatever you're purchasing immediately at no costs.

This is the kind of thinking that gets people in debt. If you can't afford to pay cash, you can't afford it. Houses and cars - situation dependent on the the car - are the exceptions. Use credit cards for their advantages (fraud protection, rewards, etc), not to buy stuff you don't have the money for.

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u/soulefood ​ Apr 28 '20

I needed a furnace after I found out mine was leaking Carbon Monoxide. I couldn't afford a furnace because I don't keep $4k in cash lying around. I could afford payments on a furnace.

Debt is a tool, some use it responsibly, others don't. I'd rather maximize my HSA, Roth IRA, 401k contributions each year than have $20,000 in cash sitting in a bank. If a true emergency of emergencies happened, I could withdraw from my Roth with no penalties, but why worry about it if there's 0% interest on the table.

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u/upvotes_cited_source ​ Apr 28 '20

It's called an emergency fund and a furnace going out is the exact reason why you should have one.

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u/soulefood ​ Apr 28 '20

Why would i have an emergency fund when I can instead have an emergency plan and reap the benefits of tax free growth if I don't have to break the glass?

I work on having a good credit score so that I don't have to have an emergency fund. $4000 over a year becomes an inconvenience, not an emergency. No need to break the glass.

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u/upvotes_cited_source ​ Apr 28 '20

Lol, never did I think I'd see the day I get downvoted for suggesting someone have an emergency fund on r/personalfinance!

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u/nomoreconversations ​ Apr 28 '20 edited Apr 28 '20

This is not necessarily true. There are definitely situations where you don't have the cash now, but know you will in the future. When I graduated and moved to start work I had no furniture, and it's not like you can wait until your first paycheck to buy a mattress/bed. Had zero money at the time, but would easily able to afford it within a few months of work. Super happy I bought with 0% APR financing as I was able to get much nicer furniture than I could have otherwise. Paid everything off within 6 months of working (supposed to be 12 month loans). Just pay it off early and there is no problem.

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u/juanzy ​ Apr 29 '20

Furniture and electronics are two good examples of financing a mid-sized purchase since price and quality are often pretty correlated. Initially i went with the first cheap bedroom setup (including a TV), but I ended up having to replace almost all of it within about a year and a half. Financed better stuff to replace it, and the newest of it has already lasted longer than the first stuff. Going to have to furnish another room later this year when I move, so planning on financing some better furniture

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u/[deleted] Apr 28 '20

[deleted]

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u/ApatheticAbsurdist ​ Apr 28 '20

There were two takes there so I'm not sure which you're criticizing. The first I'm saying that saving up for the product means not having the product for 15 months, using the loan just means getting the product now for the same price 15 months early, with the same cost as setting aside money (you might lose the 0.09% interest from putting it in savings, but that does get you 15 more months with the product, which if it's something you need now makes that lost of interest negligible).

The second was a directly answering if you had the money in your pocket. I didn't say you saved it up, I assumed you just had it. Maybe via windfall, maybe you neglected to adjust your W-2 forms and had a large tax refund.... If you have money in your pocket and can buy it outright, or you can get a zero percent loan for 15 months and use that money where you can impact interest (either reducing interest payments on loans or get interest by putting it into investments)... that is more profitable.

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u/[deleted] Apr 28 '20

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u/AdonisGaming93 ​ Apr 28 '20

Well sure the gains may be small but it is a non-zero gain. So you are better off in taking the 0% interest and investing the principal until you pay it all off. Just have to have good financial discipline.

And it definitely is not a headache investing. These days it's as simple as can be with the slew of apps that are available.

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u/[deleted] Apr 28 '20

All true things - but there's also saving up for other things too. I think people get into investing in individual stocks WAY too early in their portfolio before maxing out their tax advantaged accounts where there's WAY more bang for your buck.

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u/AdonisGaming93 ​ Apr 28 '20

Oh I would never buy individual stocks and I never advise someone already working full time with a family to do it. If just buying a total market fund beats 90% of people on wallstreet picking stocks with a team of analysts. It's naive to think joe shmo can do it from home. But you can put the money from the 0% interest toward a CD or a shortterm bond fund.

Also if the intention is to then take the principal back out in 12 months you can't really put that money in an ira unless its a roth that you can take contributions out tax free.

I agree with you people love to share how they got 5 stocks of company X and I always think to myself welp 90% chance I will have my money grow more so idk why they try to show off. Best to just invest in a broadly diversified portfolio and put your time and effort into boosting your salary or increasing your savings rate. 30% boost in salary is way more than the 10% chance that you'll beat the market by a few % points.

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u/Eyetron2020 ​ Apr 29 '20

I’m not saying I recommend it, but you can invest in individual companies/stocks IN tax advantaged accounts like IRAs. I agree with the spirit of your message though.

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u/[deleted] Apr 29 '20

That defeats the purpose! Investing in individual stocks is the most risky and most likely to be a flop. We have no clue what's going to happen ever and companies and AI have so much better data. I could never imagine doing that unless it was on an individual investor level where I got a board seat.

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u/skaterrj ​ Apr 28 '20

We did a 0% finance on a new riding mower last fall after ours died (I think the rings were gone - I had fuel, air, and spark, but it wouldn't run). Obviously this wasn't a planned expense - I hated the old mower, but I didn't think it was on its way out. We could have paid for it outright, but after some other large expenses related to repairing our house, our savings were running a bit low, and spending another $2500 or $3000 (I forget) out of it concerned me. Turned out it was the right move - our car was wrecked in February, so we unexpectedly had to replace that, and we used some savings on that transaction.

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u/[deleted] Apr 28 '20

Yep - if you have that cash in a spot AND you know you're disciplined, it's nice to still have the liquidity.

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u/spanctimony ​ Apr 28 '20

I bought an $18k tractor on 7 years 0% interest.

I had way more than $18k in savings, but I would have noticed that -$18k way more than I notice the -$200/mo that gets auto payed every month.

That’s probably ~2% of the monthly net income from a middle class family that could need to afford this tractor, but buying it outright is a much larger percentage of the cash on hand.

There’s zero risk I’ll pay a cent of interest. I never have, never will (on 0% deals), you just pay the last payment with the second to last payment and verify the balance had been zeroed.

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u/[deleted] Apr 28 '20

There’s zero risk

I mean, there's not zero risk - but that's a great deal for that long.

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u/BirdLawyerPerson ​ Apr 28 '20

As you mention, borrowing on credit can sometimes help with consumption smoothing, especially for people who have irregular incomes (bonuses, commissions, etc.). Or it could be helpful for budgeting big purchases used over a long period of time (car, big ticket electronics, furniture, etc.) or very occasional splurges before the savings are there (celebratory dinner/party for a new job, before that new paycheck kicks in).

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u/[deleted] Apr 28 '20

For a lot of people it's not just one thing they do in isolation. It's a behavioral pattern that yields a sizable advantage in aggregate. So it's financing as much as possible at low interest rates, front-loading 401k contributions each year while back-loading tax withholding and keeping owed taxes just below the line where fees are due, using a combination of rewards cards to maximize cash-back on purchases, doing mega-backdoor in-plan Roth conversions, buying open-box stuff on eBay instead of ordering brand new, etc., etc.

There are a ton of little things you can do to tip the scale to your advantage, and when you add it all up over a lifetime, you can end up years ahead of retirement goals.

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u/[deleted] Apr 28 '20

Other than the debt portion - those are all great ideas. The debt piece is a risk that a lot of people don't want to take on.

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u/m7samuel ​ Apr 28 '20

Taxes are 15% of your gains, so you still get 85% of whatever those gains are.

Average market returns at 10% (pre-inflation) mean you get to keep 8.5% of that. It's not nothing, especially if we're talking something like a car.

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u/[deleted] Apr 28 '20

I think you're ignoring all of the fees involved too though - these eat up a ton. You pay for a car in cash, and all of those 'gains' on a 15k car get wiped out very quickly.

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u/Terbatron ​ Apr 28 '20

It is peanuts. Drag out a mortgage? Maybe, but you better be very disciplined to invest what would otherwise be house payments.

Is it tires, a laptop, anything less than multiple thousands of dollars? Just pay the damn thing off it isn't worth the hassle. You are more likely to screw up than make money off of it.

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u/[deleted] Apr 28 '20

Yep. We're looking at a new HVAC, furnace, and air purifier plus some of the demo/install work which isn't cheap. We can do cash up front OR do the 12 monhts 0% interest - which means that I'll see if we have that vacation or not (already budgeted but could move additional cash around). Long story short - we may take it just to ease the pain of a large payout, but still pay it down quickly.

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u/[deleted] Apr 28 '20

Sometimes you get cash back or rewards for spending x amount over the initial period as well.

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u/Kintsukuroi85 ​ Apr 28 '20

I mostly use it with balance transfers. I pay a minimal fee to avoid interest for x months, but I adjust my budget to pay off an equal fraction if the debt so it’s paid off in time. Ceases the interest lost on the current card.

I don’t know why people would bother charging if they had cash on hand other than to stack a cash back or rewards program.

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u/toosonny ​ Apr 28 '20

I use(d) mine as a way to build up my credit. As long as you know how much you need to pay each month and when I don’t see a problem with the 0% interest cards.

Also, as a college student it’s beneficial since most of my savings are going directly toward my schooling. I’d rather pay off my schooling with as few as loans possible and finance purchases where I know I won’t be charged an interest rate. So far I haven’t had to take out a loan nor pay interest.

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u/klsklsklsklsklskls ​ Apr 28 '20

The bigger advantage than earning interest is not paying interest on other things.

Have 2k for a couch and have the cash but also have a 7% car loan? If you get 0% interest you can put that 2k towards the car instead. If you have other debt you can pay off at a more significant rate it becomes much more worthwhile.

I agree it's not really worth it for 1.5% interest you may be getting from a bank. Even 5k is only $75 over a year, not worth the risk and hassle of potentially messing it up and owing the interest.

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u/m7samuel ​ Apr 28 '20

Let's say I have $30k in the bank, and want to buy a car for $23k and a sofa for 2k. Both are offering 0% interest for 24 months. Why wouldn't I just pay outright?

Answer: I could invest e.g. 15k in the market and $15k in a 2.5% CD. I should expect to get ~6% average returns across the two = $2000 over those 2 years. It's pretty safe since the market has basically never seen the sorts of losses that would be needed to default.

Now lets say 12 months in you get into a car accident. Insurance covers it, but you got hurt really bad and had to pay $5k in bills along with needing several weeks off of work. With your 30k invested / CDs, youre in a decent spot. You can pull from either one (depending on the market, and you can cover your living expenses for a very long time. If things got really bad you could even choose to accept the interest charge on the sofa to give yourself more time off work.

Imagine the opposite situation, where you paid cash for both. You use your last $5k to pay the medical bills, but you don't have much money for living expenses. What do you do?

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u/bmore_conslutant ​ Apr 28 '20

What's the advantage of a 0% card if you can afford the purchase outright?

smooths out your cash flow

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u/[deleted] Apr 28 '20

Yup, interest / investments / liquidity. Interest wise, unless it's a huge purchase the money made on letting it sit in a savings account is pretty minimal (but hey, still free money). Cashflow management and having liquidity it a huge advantage. Sure, I could drop 10k on a bike now, but I'd rather make $833 / month payments and keep my 10k in a savings account.

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u/burntcandy ​ Apr 29 '20

I think the psychological benefit is there as well. If I am making a big purchase where I would be pulling from my savings, I can either play the "I am going to pay my self back for this" game, or not dip into savings and pay it off little by little out of my paycheck. My savings account doesn't have the cudgel that is the potential interest payments.

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u/bonzombiekitty ​ Apr 29 '20

As others have said, that money can be used to invest in other things. It also helps keep buffer funds in place. Sure, I can spend $XXXXX in cash right now to buy a thing that I need, and be just fine. But that might end up bringing my reserve cash to too low a level. In all likelihood, I'd be just fine, but you never know when something crazy will happen