Is zero-percent financing more favorable than overdraft facilities or installment loans?? We show you that zero down payment and zero interest may sound good, but they are usually more expensive for you.
zero-percent financing sounds better than it is
In the past, it was said that if you can’t pay cash out of your own pocket, you can’t afford it – so you don’t buy it. But this conservative basic rule of budgeting has long been a thing of the past. The new kitchen, the huge flat-screen TV, the latest games console, the fancy high-class sound system – all things that are not urgently needed, but are often objects of desire, even though the money for them is actually lacking.
Buying on credit entails costs that many people shy away from. Retailers have come up with a practical solution: 0% financing for cars, furniture, electrical goods and other luxury goods. That sounds tempting: no down payment, no interest – no disadvantages? No way. Dr. Klein advises that financing methods be examined carefully in each individual case and points out alternatives.
The disadvantages of 0% financing: opaque and expensive
Paying off expensive items in small installments and not paying any interest – the advertising brochures are full of offers for 0% financing. However, consumer groups are critical of this, because the free credit tempts consumers to purchase items that they can’t actually afford.
What’s more, the basic price of products offered with zero-percent financing is often more expensive from the outset. In this way, retailers compensate the financing banks for the loss of interest. This means that the offer may be considerably worse than that of the competition.
Consumers should pay particular attention to the fixed interest rate of 0% financing: sometimes banks do not grant the zero interest rate for the entire term of the loan, but only for the first few months. Subsequently, a higher target interest rate then applies, so that the monthly installments suddenly increase. So be sure to pay attention to the small print here.
Less consumer protection rights with zero-percent financing
According to a recent BGH ruling, 0% financing is not a consumer loan agreement because the customer does not pay interest on it. As a result, however, they forfeit consumer protection rights. If the customer wants to exchange the purchased item, for example, he must still continue to pay the loan. Because the bank’s claim to the installment payment remains – regardless of whether the dealer takes the item back. If the bank agrees to cancel the contract, it usually charges cancellation costs, which are usually one percent of the loan amount.
Only use the overdraft facility on the checking account for a short period of time
The overdraft facility on the checking account has a decisive advantage over zero-percent financing: in most cases, it does not have to be applied for first and is available as soon as the purchase is made. However, banks pay dearly for this flexibility with interest rates of up to 13 percent. The duration of the overdraft plays an important role, because often the amount is calculated exactly to the day. the top rule for overdraft is therefore: never use it for longer than absolutely necessary. Otherwise, you should first check whether rescheduling to an installment loan is an option. Because the interest rates are much more favorable here.
Buying by credit card: uncomplicated, but a deceptive maneuver
Credit cards have similar advantages and disadvantages as overdraft facilities: they are a practical shopping companion with a quickly available credit line, which can, however, be expensive. Although common card models do not incur any interest charges. But the bookings are collected and usually debited from the current account as a total sum once a month. The situation is different with revolving cards, which are often available as an add-on to 0% financing: here, only partial amounts are charged to the checking account rather than the entire amount – as with installment payments. All amounts that remain on the credit card are subject to interest charges of around 14 percent per year.
When paying by credit card, it is important to remember that the current account must have sufficient liquidity to cover the debited amounts. Otherwise the account holder will slip into the red and have to pay overdraft interest on the amounts. There is a great risk of losing track of all purchases made and experiencing a nasty surprise at the next account statement.
The advantages of the installment loan: lower interest costs, better predictability
Compared to zero-percent financing and overdraft facilities, the classic installment loan performs better. It offers significantly more favorable interest rates at constant monthly installments for a fixed term. This makes the purchase plannable and predictable.
Sample calculation: an installment loan is more favorable
Let’s assume that, because of the new kitchen, you will have to pay 5.000 euros in the target. If your overdraft interest rate is 13 percent per year, you will pay a total of 650 euros in interest (13 % of 5.000 euro) for the time you overdraw your account.
An installment loan, on the other hand, you can get for about four percent effective annual interest rate. As our installment loan calculator shows, with a monthly rate of 425.59 euros and a contract term of 12 months, your interest costs will be 107.03 euros. you would therefore pay 542.97 euros less interest with an installment loan than if you took advantage of your dipso.
|5.000||13 %||650,00 €|
|5.000||4 %||107,03 €|
Conclusion: installment loan instead of zero-percent financing
Purchasing consumer goods, furniture and luxury items on credit needs to be well thought out, because it can take a long time to pay them off. 0% financing and maxing out credit lines on overdrafts and credit cards are not recommended – if in doubt, it’s better to opt for an installment loan at good conditions. You get solid, predictable financing without any stumbling blocks, and you retain your consumer protection rights.