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
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.
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.
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.
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.
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.