Consider no-interest offers with caution

A no-interest deal on a car loan can save money, but other offers can be a trap for consumers.

Zero-interest financing can be a real money-saver on large purchases, but sometimes those offers can be a financial trap.

Debt can be a useful tool for breaking large expenses into smaller ones, and sometimes it’s the only practical way to buy something like a house. Interest charges are the price we pay to use that tool.

Sometime, a business will offer loans with little or no interest in order to move more product. We see this often in the ads from auto dealers, and a low or no interest deal on a car loan really does save money.

The offers to beware of — the fine print to look out for — are the increasingly common ones that offer zero-interest deals for a period of time, with a great big catch.

The catch is typically something like this: If you fail to pay off the balance within a set period of time, often 12 to 18 months, they will retroactively charge you an astoundingly high interest rate from the date of the purchase. So, you’re zero-interest loan can turn into a 29 percent loan.

Sometimes, the interest rate can go from zero to outrageous if you’re simply late on a payment. It’s like having a bear trap in your living room. You know it’s there, you don’t plan to step on it, but people can slip up sometimes.

Like many credit offers, these deals can be helpful in some situations. So can rat poison. The important thing is to read and follow the instructions.

Loans with a retroactive interest clause are different from, and worse than, the offers that may show up in the mail from a major credit card issuer.

With major credit cards (as opposed to store-affiliated cards), people with good credit regularly get offers to write a check against their credit line, or transfer a balance, with little or no interest for 12, 15 or 18 months.

Those offers typically come with an upfront fee, usually between 2 percent and 4 percent of the amount borrowed or transferred. After that, there’s a low (or no) interest period, unless you make a late payment, in which case the interest rate can soar, but not retroactively.

Such loan offers are tools that can be put to good use if your other choice is paying down high-interest credit card debt. A 3 percent charge upfront and zero interest for a year or more could save real money if your other option is taking a year to pay off credit card debt with a high interest rate.

Again, the key is to always pay on time. If you use online banking, setting up automatic payments can help.

With interest rates on savings as low as they are today, there’s no real advantage to a short-term zero-interest installment loan on a relatively small purchase if you could pay cash instead. It’s not as if you’re going to make much money on the savings you temporarily keep in a bank or credit union.

The reason for such loans is cash flow. As recently reported, a federal study found that nearly half the households in the nation couldn’t handle an unexpected expense of just $400 without borrowing or selling something.

So, maybe you can’t afford to drop $600 on a set of tires or $4,000 on a new air conditioning unit, but you could afford to pay $50 a month for those tires, or several hundred dollars a month for the new HVAC.

Makes sense if there’s no better option, but never, ever pay late or miss a payment. And read the fine print so you’ll know what happens if you do.

Reach David Slade at 937-5552.