Zero-interest loans may seem to be an attractive option. But, often the lenders may keep certain things unsaid or unexplained. To avoid a situation where you’re caught unawares, you should thoroughly pore over the terms and conditions of a personal loan, an instalment payment plan, or a 0% credit card. However, even after going through the offer document, you may not be able to fully comprehend that there could be certain inherent risks that come with these plans. It needs to be clarified here that you can minimise the downside risks to these offers by paying back your dues on time.
Important Things That You Need to Be Aware of:
- Increased likelihood of an impulse purchase: When you’re told that you can make a high-ticket purchase by spreading the total purchase value over tenures that may range from 3 months to 24 months or even 36 months, it might sound like the best offer available. However, it can so happen that because you think that you’re saving on interest payments, you end up purchasing an item which may have only partially better features and utility, while still paying interest in the form of various administrative charges.
- Deduction of the full purchasing value upfront: While you may think that by spreading your payments over a number of months, you’ll be able to reduce your immediate cost burden, you may be slightly off the mark. The full price of your purchase will be deducted from the credit limit of your card and the amount would be blocked for the entire duration of the loan. Each successful instalment payment would restore a portion of the credit limit by the quantum of the instalment repaid.
- End date could be ambiguous: Watching out for the end date closely is very important. It might so happen that the monthly payment deadline on your loan may not coincide with the end date of the loan. Even if you have cleared the dues diligently before your last instalment payment but fail to clear the last one before the end date simply because you were unaware that the end date and the monthly due date were different, you could be in for a shock. As soon as you default, a penalty rate and other penalty charges may be imposed and the last instalment could turn into a heavy debt.
- The effective interest rate could be high: Even though the instalment payment plans are advertised as 0% interest programmes, you’ll still have to pay an effective rate of interest. Most banks charge a one-time processing fee, amounting to 3% or 5%, depending on the tenure selected.
Standard Chartered Bank (SCB), for example, offers two tenure options on the EasyPay instalment payment facility, namely 6 months and 12 months. It charges a one-time processing fee of 5% on both the tenures. The effective rate of interest on the 6-month payment plan is 17.6% p.a. and that on the 12-month plan is 9.5% p.a.
- Minimum purchase value requirement: In order to sign up for one of these plans, you’ll have to meet a minimum purchase amount criterion on most cases. It is usually S$500 for most plans. By charging a high-value purchase to your card, you might end up utilising a big chunk of your credit limit. Rebuilding it is difficult and risky, especially if you don’t have a stable income.
- Early repayment charges: Most banks levy an early repayment penalty fee that may usually vary between S$100 and S$150. In addition, early repayment or card account cancellation will mean that you have to settle the outstanding balance of the loan immediately. Also, the dues have to be settled at the regular finance charge rate.
- No rewards on payments: Some of the banks offering 0% loans don’t offer rewards like cashback, cash rebate, or reward points on payments made towards these plans. This means that you’ll lose out on the benefits that probably attracted you to the card in the first place.
- Credit profile can play a role: What is often left unsaid is that your credit profile plays a more important role than you might realise in determining whether you’ll actually be offered a 0% interest card, personal loan or purchase payment plan. Without a desirable score, you might not qualify or higher interests may be charged. Contact your bank to gather all the details before signing up.
Also, the no-interest claim might be slightly misleading if all the clauses and sub-clauses aren’t laid out in the open. Firstly, the zero-interest condition will only be honoured if you repay the due before the end date. If you fail to make the payment in full before that, you may not only have to pay interest on the remaining due but may even have to pay interest on the total purchasing value. Moreover, late payment charges would apply and interest would be levied on these administrative fees, too. Not to forget the fact that the lender may even rescind the 0% interest rate offer and introduce penalty rates that can increase the size of your debt burden significantly.
If you sign up for this plan just before taking a big personal loan, it can prove to be calamitous because the total credit limit used (remember the full price is deducted upfront) would be used for the calculation of the total debt servicing ratio, which as per the new framework, has been set at a threshold of 60%. If the value of the loan and other outstanding credit lines exceed the 60% value, your application might be rejected.
UOB, too offers a similar plan called SmartPay. You can choose from 3-month, 6-month, and 12-month tenors. A one-time administrative fee of 3% is charged on the first two tenure options and 5% is charged on the third option. The effective rate of interest ranges from 9.5% p.a. to 18.18% p.a. Hence, it is advisable that you evaluate your financial standing carefully before signing up for one of these loans.
0% financing – term loans and revolving debts can still offer a number of benefits. Loans, when used in the right way, can mean that you’ll make substantial savings and can conveniently spread your loan over a tenure of your choice to improve your cash flow.