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0% financing - how favorable is the loan without interest really?

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What does 0% financing mean?

With zero-percent financing, you purchase a product and pay off the purchase price retroactively in small monthly installments - and, at least according to the advertising promise, without any surcharge due to interest. What many do not know: Basically, such offers are a very simple installment loan with a fixed term and a fixed installment amount.

With 0% financing, you actually conclude two contracts at the same time: a purchase contract with the dealer and a credit contract with the bank with which your dealer works. In this way, the dealer receives the money for the goods directly from the bank in the form of the agreed credit amount. And you, in turn, pay the bank back the sum in monthly installments as the borrower.

The advantage for you is that you don't have to save up for the new kitchen unit first, or attack your perhaps well-invested savings, but can make the purchase immediately. The retailer, on the other hand, generates more sales from customers who might not have purchased otherwise. And the bank ultimately benefits from valuable customer data, which it obtains in this way without any advertising.

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How do I get zero percent financing?

You can take out the 0% interest loan at the dealership without any red tape, either online or on site. You do not need to go to the bank. The bank also does not check your creditworthiness separately. All they need is your signature and - depending on the dealer - proof of income or a positive SCHUFA report.

For which purchases is zero-percent financing often available?

Loans without interest used to be limited in time as promotions and restricted to larger investments such as a new car. Today, furniture and car dealers or electronics stores in particular offer such zero-percent financing deals on a regular basis and even for goods at low three-digit prices. Especially often you get offers for interest-free loans for:

  • Furniture
  • Kitchen units
  • Cars
  • Electrical goods (smartphone, TV, tablet, game console...)
  • Luxury goods (for example, watches)

0% financing: bargain or cost trap?

An interest-free loan initially seems to have only advantages for you. But consumer protection groups have long warned of the considerable risks of such offers. In the following, we provide you with an overview of the most common weak points of zero-percent financing.

Zero-percent financing often comes with zero advice

When you take out an interest-free loan, you should be aware: Dealers have sales goals. But rarely banker training. You will therefore not be able to expect sound advice or information about the risks and special features of taking out a loan. All the more so: It is up to you to take a critical look at an offer of 0-percent financing.

Interest-free loans easily lead into the debt trap

Financing offers with 0% interest tempt you to buy things that you can't actually afford. Thereby often still the aggressive advertisement helps. A zero-percent financing is completed quickly, but not repaid. In the end, even small installment amounts add up to a higher burden.

At the latest when you overdraw your account and your overdraft facility has to cover the installments, the good deal with the loan without interest has turned into an expensive deal with even very high interest rates.

Also consider that after a few 0% financing you suddenly no longer get a favorable installment loan from the bank. Because many credit inquiries increase your Schufa score. Regardless of whether you have always reliably serviced these loans or not!

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With credits without interest the product price is often much too high

Many a supposed bargain offered for zero-percent financing turns out to be overpriced on closer inspection. This is because many dealers compensate for the loss of interest from the cooperating banks by offering higher prices from the outset.

Therefore, always compare the prices of the competition in advance. Many products are much cheaper elsewhere, so the bottom line is that financing is not worth it.

Beware of hidden costs with 0% financing

Unfortunately, zero percent interest does not always mean zero percent costs. In many cases, banks claw back their interest through the back door. We explain what to look out for before committing to a zero interest loan.

Watch out for fees in the fine print of 0% financing.

The 0% loan terms and conditions often hide fees that weren't mentioned in the dealership discussion. These can be processing, account management or brokerage fees. These items are not always legally permissible! Therefore, never agree spontaneously, but check the credit conditions at home in peace.

Do not get involved in additional insurance when taking out an interest-free loan

Zero-percent financing often works with additional insurance that you as a customer are supposed to take out for your protection. This usually involves residual debt insurance, credit default insurance or payment protection insurance. If such an insurance then costs 10% of the loan amount, your 0% interest is gone and only the bank has made a good deal.

Is the loan without interest really interest-free?

There are 0% financing where the zero interest rate is only for a limited time and then a much more expensive interest rate. When buying a car, the agreed interest-free term often also ends with a "balloon payment", a final payment which in turn can only be met by taking out a new loan. In both cases, we are not really talking about 0% interest. Here, too, we advise you to study the terms and conditions of the loan carefully.

Return unwanted credit cards for 0% financing

Some banks automatically link 0% financing to a credit card. In this way, even though you did not ask for it, you get an additional credit line, the conditions of which are then significantly worse. The consumer protection agency warns against such methods: "It's best to cancel unwanted framework credit agreements and send the credit card back invalidated."

What rights do I have as a borrower with 0% financing?

Zero-percent financing is not legally considered a consumer loan because you do not pay interest on the installment loan. Accordingly, consumer protection only applies to a limited extent. This leads to typical complications, which we summarize for you here:

Right of withdrawal: the right of withdrawal normally provides that you can return the goods to the merchant within a period of 14 days and get your money back. In the case of zero-percent financing, this previously applied only to the contract for the purchase of the goods, but not to the loan agreement. In other words, the installments were still due even after the goods were returned. Now you can also revoke the credit agreement if the agreed credit amount is at least $200.

Complain about defects and deficiencies: If a purchased item shows defects or deficiencies during the current financing, you must arrange repair or replacement with the dealer. However, you must not suspend the loan installments! In this case, too, the purchase and the loan are separate contracts. If the dealer still does not succeed in eliminating the problems, you have the option of enforcing a reduction in the purchase price. However, the bank must also play along in this case!

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What are the advantages and disadvantages of 0% financing?

Some arguments speak for, others against a loan without interest. To help you decide, we compare the two sides:

Advantages with 0% financing:

  • Purchases also possible without equity capital
  • no long saving necessary, no well interest-bearing capital must be attacked
  • short-term financial bottlenecks can be bridged
  • unbureaucratic contract conclusion

Disadvantages of 0% financing:

  • poor advice from sales staff
  • the debt risk increases with small loans
  • the Schufa score increases
  • Product prices are often too expensive
  • cash discounts do not apply
  • often hidden costs in the fine print
  • limited consumer protection rights

What cheaper alternatives are there to zero percent financing?

In some cases, it may be more favorable for you to choose a financing option other than 0% financing. We list the most common models with their advantages and disadvantages below:

Overdraft credit: immediately available but more expensive. The overdraft facility has the advantage that it does not have to be taken out first, but is available immediately. The big disadvantage: banks charge an average of 9.78% debit interest. This means that the overdraft facility is really only suitable for bridging very short periods of thirst.

Credit card: convenient but tempting. Credit cards "postpone" payment by usually billing only once a month. Disadvantage: you quickly lose track of payments made. You should only use a credit card if you can guarantee that your checking account is covered. Otherwise, incurring debts with this variant will be very expensive. We explain which credit card suits you in our credit card comparison.

Installment credit: transparent and clear. With installment credit, you benefit from transparent conditions and do not have to compromise on consumer protection rights. In addition, you can freely choose the merchant and opt for the most favorable product offer. Depending on the amount and term, installment loans are currently available from under 3% effective interest (as of July 2018). You can find daily updated conditions with our loan comparison.

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