Are 0% APR Offers a Scam?

The higher a loan’s annual percentage rate, or APR, the more you will have to pay in interest and fees. That’s why, all else being equal, you want to find a loan with the lowest APR possible. By this logic, a loan with 0% APR would be the best loan of all — or so one might think.

Anything that sounds too good to be true is probably not, and that rule applies to 0% APR loans. It’s all a matter of timing.

The truth behind 0% APR loans

The only way to get a true 0% APR loan is to borrow money from a friend or family member who is willing to lend it to you at no cost. Any other 0% APR loan or credit offer is either a temporary offer or will come with certain stipulations.

“If you miss on-time payments or make the minimum payments, your 0% perk can be revoked,” says Jared Weitz, CEO and founder of United Capital Source Inc. “Even a single late payment can be a reasonable cause for the bank to increase your interest rates. If your bank writes 0% APR in bold advertisement on the card, read the fine print. Not all transactions will fall within the percentage.”

Of course, there are as many different kinds of 0% APR loans as there are loans in general.

The partial field guide to 0% APR loans

Since you should approach any 0% APR offer with scrutiny and skepticism, it is important to understand the different kinds of offers you are likely to encounter.

Mike Scott, a Mortgage Portfolio Manager with Independent Financial, offered a few examples of typical 0% APR offers:

Automotive loans

“The 0% APR offer is often in lieu of certain rebates. Depending on your credit, down payment, and the term of the loan, it may be better to take the rebate instead of the zero interest rate.”

Credit card offers

“Credit cards often will offer a 0% rate for 9 to 18 months, but many of them also charge a balance transfer fee of 3%. If you pay the 3% balance transfer fee, then the effective rate on the card is not 0%. If you pay the balance off in 12 months, the effective rate is 3% or more, since the assumption is that your balance is declining throughout the year. If you pay it off in 12 equal payments, the effective rate is 6%, since your mid-point balance is going to be half of the original transfer.”

General purchases

“They offer ‘no interest if paid off in 12 months’ or something similar. Many of those have a stipulation that, if you go past the offer term, you pay all of the interest that accrued during the term. In other words, if you take 13 months to pay off the balance rather than 12, you will pay the interest that would have accrued during the entire term."

Using 0% APR offers to your advantage

Even though many 0% APR offers may take advantage of you, some might be beneficial.

“Many clients have transferred their balance to a card with an 18-month 0% offer in order to get ahead of their credit card payments,” says Nathalie Noisette, Chief Capital Architect at Thrive Business Network. “If the offer was only six months, it may not have been worth it. Another reason a card with an introductory rate of 0% may be good is if you plan on making a big purchase.”

Of course, if the card has a balance transfer fee, you will need to take that into account. Note that most credit cards have a grace period, and if you pay the bill in full each month, you may be able to avoid paying any interest altogether.

Always follow the essential finance rule: never sign anything unless you are sure of the terms, including the amount and when you will make the payment, and if you can comfortably make those payments.

Nathalie Noisette is Chief Capital Architect at Thrive Business Network. and the host of the Mental Money Podcast.

Mike Scott is currently a Mortgage Portfolio Manager with 20 years of experience in the mortgage industry, specializing in low- and moderate-income lending, first time homebuyer programs, and down payment assistance. Before that, he worked for five years in consumer lending, mainly in the automotive industry. He has been a regional production manager for one of the big banks for several years before choosing to work for smaller, more responsive banks.

Jared Weitz has been in the financial services industry for more than 10 years. Due to his extensive work experience and deep network of close financial relationships, he handles a multitude of different finance options for his clients and contacts. Throughout the years, he has held positions in some of the largest business financing companies in the United States. Some of his roles have been: underwriter, director of business development, managing partner, and currently, CEO of United Capital Source, LLC.