paying off 0% interest loans
What's the opinion about paying off 0% loans- I hate having loans- I am semi retired and
had work reduction with COVID. I keep trying to pay more than the amount- but not sure
that's the recommended way to proceed.
Your thoughts, please! TIA
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I would continue to Payoff. I made the mistake of keeping a 0% APR balance only to find other huge unexpected expenses pop up later. I eventually had to get another 0% card to balance transfer and paid it off just before a month when the second credit card's promo period ends. Paying off any card or loan is a big peace of mind for me personally if I had a stable job. Having said that, if you are at risk of losing job impacted by covid, the better option is to keep a pile of cash and pay minimum for your loan.
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BigFanofRacing Thanks for your input. Im beginning to think I should pay just the minimum as well- but darn-I hate to owe!
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Mathematically there is no advantage to paying it off verses setting the money aside to be able to pay it off when ready. You may give up a little interest if you do pay it off. It really comes down to if you get a psychological benefit of paying it off or you don't have the discipline to keep the money that would have otherwise gone to the loan.
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The danger of 0% loans is they often don't stay 0%. By not paying it off before the rate changes (or at least saving enough to pay it off), there's obviously a larger principle when the rate does change.
I am mathematically inclined, so will usually minimize interest. If that loan will always be 0%, that would be the last thing I paid off. There may be overriding considerations, though. If the loan is through a family member or friend, that would be the FIRST loan I would pay off.
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dakinemaui
I know that my rates won't change- so I can plan accordingly. Just hate owing $ ! But I should be trying to save as much now, I guess. Payments are exactly the same- the one credit card with 0% is calculated to end when the 0% offer ends.
Thanks for your input.
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I had a near 0% loan that I didn’t have to pay off yet, but would have to in 2-5 years. Just paid it off and am so glad! To know those monethly payments won’t come any more, possibly at an inconvenient time, is so nice!
agree with others that real uncertainty needs a little more cash at hand...
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Powder Blue Pony
yes - i agree- it's the uncertainty IF i will really get my job back. Guess I should just plug along....
thanks
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If it bothers you, pay it off! If not, set aside the payoff amount so that you know you could pay it off at any time you choose. Interest rates are so low that you're not going to make a lot of extra on the funds that are set aside to pay it off.
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I guess I am in the payoff camp. I know mathematically you can make a little money by waiting but I like peace of mind better, unless I could make a lot of money LOL.
I think striving to stay out of debt can produce better financial benefits in the long run. I also lean toward simplicity in life.
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Similar but related question:
Would you enter into a 0% financing arrangement for a new purchase for which you'd already budgeted the full amount ahead of time? My itchy debt muscle says no, but my "but the interest" brain keeps kicking in. This is not a huge purchase, but over the life of the loan, I'd maybe make $150 in interest.
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Walrus 44 Ordinarily I would. Lately, I've elected not to do so because of the increased complexity if something were to happen to me.
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Walrus 44 I recently did. Bought some new furniture. Turned out i can pay that 'loan' with a credit card. Money sitting in high yield savings so i earn a little interest. Use citi double cash so i get 2% cash back on each payment. win/win. But psychologically the debt doesn't weigh on me. ETA: i calculate I'll make roughly $60.
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Herman That's a good point. 2% cash back is a higher return than most "high yield" savings accounts at this point (Ally just dropped their savings APY to 1.1%).
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Walrus 44 It would depend on if I am going to need to apply for other financing in the next 2 years and what my current credit score already is. These financing offers usually require a hard credit pull (which takes 2 years to drop off) and will appear either as a loan or line of credit on your credit report, and may affect your credit utilization and average age of accounts. All of these will negatively affect your credit score for the next time you go to apply for credit.
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nolesrule 1 or 2 points. At 830 or so I have a few to spare. If I don't use a high credit score to get credit, what's the point?
ETA: bit I agree, cant run around and grab every new credit line that offers a 0% interest deal
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Herman Yeah, I was just bringing it up as something to consider. At 830 it won't matter, but for a score of around 720 or lower it could affect your rate on a mortgage or auto loan (or even your insurance rates) if those are in your near future.
It's the changes in utilization that tend to cause larger but temporary and controllable swings in score and will have a bigger effect than the actual hard pull. But the hard pull is not controllable.
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There are two things to think about - and you have to decide which one is more important.
Mindset is important - don't discount that. If you don't like the debt "hanging over your head" then that is a big factor in your decision.
But the flip side is this - someone has decided to loan you money. For FREE. It is not costing you anything sitting there.
While it is annoying to have to make the payment every month, it isn't costing you anything to be there. And that is the key difference to remember when dealing with debt - what does the debt cost you?
Weighing the balance of peace of mind vs the amount you owe is key. But if you can have a loan for free, then in my book there is zero reason to rush to pay it off, especially if finances are tight and income is a little sketchy.
I took my $1200 stimulus check and set the required amount that I needed aside in my budget categories to cover the debt that I have zero interest on. The money is all there, but I dutifully continue to pay the monthly payments on it, instead of paying it off in a lump sum. That way it earns a fraction of interest in my account, and if there is an emergency then I have access to that money before I need to put money on a credit card where it will cost me interest. So continuing to take advantage of the zero percent gives me greater peace of mind than not having the debt - I know I now have it funded, and so it reduces my risk of taking on more debt if I do have an emergency.
In the long run - the zero percent interest promos are helpful. Thanks to the stimulus check I should be getting rid of my debt for good. But I have rolled debt over between zero % transfers for a number of years, working my way down through the debt that I raked up (much faster than I paid it down... 🙄). There's no reason not to take advantage of those promos when you can.
And - as another side note - if you're in the US, it is actually beneficial to have some debt. My BF's credit score dropped by over 10 points when we paid off a bunch of his debt and he dropped below 10% usage of his total available credit. He has slowly come back up again, but lenders like to see that you can actually manage some debt, so being "debt free" is a nice aspiration, but in terms of portfolio management for getting other loans, they like to see that you can handle it responsibly.
