Is 0% finance too good to be true?

If you’re looking to spread the cost of a big purchase, you might be tempted to take up a 0% finance offer.  

As the name suggests, 0% finance deals allow you to buy on credit without having to pay interest on the money you borrow. 

These deals may be all the more tempting now that interest rates are at a 15-year high. 

The average credit card rate is now an eye-watering 30.9% APR, while personal loans come in at 7.2% APR and the average two-year fixed mortgage is 5.35%, according to financial data firm Moneyfactscompare.co.uk. 

With this in mind, when you see “0% finance available” it can be all the more tempting to snap up the deal. It’s free money, right?  

However, before you rush to sign on the dotted line, you need to be aware of the pitfalls. 

Where can I get 0% finance? 

These days 0% deals are commonplace, but they are most commonly offered by carmakers, furniture companies and even big tech firms such as Apple.  

Apple, by way of example, offers 0% credit to customers for up to 24 months.  

But dig slightly deeper and you see that Apple is in fact just a “broker” for credit and uses Barclays as the financing partner. 

In fact, it is very unlikely if you pay for something through 0% finance that it will be the company you bought it from that administers the agreement.  

That isn’t necessarily a bad thing. But it’s worth doing your homework on the company providing the credit to find how if they have a reputation for treating their customers well. 

How do I obtain 0% finance? 

Companies make it seem as easy and seamless as possible to encourage you to sign on the dotted line.  

But there are some important checks that the financing partner will carry out to determine whether you are “worth” lending to at preferential rates.  

The lender will conduct a credit search of you. Typically, this is a ‘hard’ search, which leaves an imprint on your credit file. 

It’s also important not to apply unless you’re fully confident you’ll be accepted, as a rejection may hit your credit score. If you’re currently applying for a mortgage, it may be best to wait until after you’ve received the money before applying for additional credit.  

Not all companies offer 0% finance so it is worth shopping around if you want to obtain such a deal.  

But you needn’t be bound by that, as other options such as 0% purchase cards are possible, as Rachel Springall, finance expert at Moneyfactscompare.co.uk explains: “Borrowers may be concerned to see the average purchase APR surpass 30%, but it’s worth noting there remains a plentiful number of 0% introductory credit cards on the market.  

“Managing debts and spreading the cost of any large purchases in the months to come is crucial. As the cost of living rises it is vital consumers keep up with their repayments and switch deals if they are being charged interest if they can.  

“It is wise consumers check their credit score before they make any applications for credit and seek advice if they are struggling with their debts.” 

The pitfalls of 0% finance 

Of course, there’s no such thing as a free lunch, and that’s true of 0% finance which comes with sizeable caveats of its own.  

Personal finance expert and fair finance campaigner Dr Roger Gewolb explains: “0% interest offerings can be quite attractive. Generally, these exist to get you to buy something quickly, or to make a decision to buy something that you might not otherwise buy. 

“The first thing to look for is whether there is really a deal. Is there truly no interest on your purchase, which you are going to pay off over time rather than on the spot as you would normally do? Or, is there a hidden interest cost buried somewhere? 

“It is wise to check and see if an interest charge that you have to bear is not actually hidden in the price of the goods or services themselves. Go online and see what others are offering the same goods or services for. You may be surprised that your 0% offer is to finance over time the same product at a rather higher price and that tells you where the interest is that you are actually paying. 

“Next, take a careful, close look at the terms and conditions, the Ts&Cs, in the agreement you are going to sign. Does it have large penalties for repaying early or otherwise terminating the deferred purchase agreement? Does it contain charges for servicing, or warranties, or insurance, or other extras that are actually interesting but are being called something else?” 

“Simple, common-sense approaches like these will tell you whether you are actually being offered a true 0%, no finance charge deal. 

“If you want the item or service, it may not matter if the actual interest charge is hidden in these ways; you may not care. Do you want the item and is the payment schedule acceptable? If so, end of story. 

“However, if you can get the goods or services somewhere else at a cheaper price by paying cash or putting it on your credit card, then it is smart to do that as an alternative.” 

Stuart Crispe, founder of online financial professional directory service Sunny Avenue warns that failure to keep up with payments could create big problems for borrowers. 

“I’ve spent most of my career in banking, including retail and I have seen many clients with 0% consumer finance purchases gone wrong,” he says. 

“The most common cause of this is that with most policies, you agree to a minimum payment. If you fail to make the minimum, you risk losing your preferential terms. That means losing your 0% interest. It’s a horrible spiral as you then end up requiring a loan to refinance.” 

But Crispe believes that 0% finance can still be a good way to fund a larger purchase if can afford to keep up with the repayments: “If you have a history of missing payments, I recommend setting up a direct debit to cover the minimum.  

“That way, you will never miss a payment and retain your 0% finance. If you can manage that, nothing will beat it from a cost of borrowing point of view.” 

Top tips for managing 0% finance 

1. Only agree to make the payments if you’re 100% sure you can keep them up for the duration of the loan 

2. Read the Ts&Cs carefully before agreeing, look for buried charges relating to non or early repayment 

3. Check the price of the product against competitors as the cost of finance could be “built in” to a higher initial price 

4. Make sure you’re not committing to paying for unnecessary add-ons such as insurance or service charges 

5. Set up a regular direct debit so you never miss a payment 

6. Shop around as 0% finance might not be available for the product you want and an alternative such as 0% purchase credit card could be more flexible. 

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