Advertising spots and flyers often leverage the opportunity to purchase goods and services with zero-interest loans . You are tempted, but you are afraid that there is a “rip-off” behind this kind of offer. You are wondering how it is possible to purchase a product in installments and repay the money received on credit without paying a penny of interest and various costs. Asking yourself these questions is legitimate, especially if you don’t know how these types of loans work.
In any case, you do not have to worry, now, I will provide you with all the explanations necessary to clear your ideas, at which point all your questions will be answered. Reading the article you will understand exactly what the famous TAN and APR are and how they affect the amount to be returned to the lender. Furthermore, I will show you the difference between “zero rate” and “real zero rate”, which many tend to underestimate. The article also contains three examples, which differ slightly from each other due to some small features that however deserve maximum attention.
So what are you waiting for? Start clearing your mind right away by reading this article that explains in detail what zero-rate loans are!
Zero interest loans: what they are
Zero interest loans are a particular type of “consumer credit”. This means that we are faced with a financing lasting 18/24 months, aimed at individuals and directed to the purchase of goods or services or to the simple payment by installments of a certain expense to be incurred, where the TAN is always with percentage 0 It is good to underline from the beginning that only in some cases also the APR could be equal to 0. Before proceeding with the explanation of the zero interest loans, it will be good to clarify what are the two main building blocks of the loan, namely the TAN and the APR which are also the fundamental basis of this particular type of loan.
The TAN and the APR as mentioned above are two of the building blocks of the loan. To fully understand what was said in the previous paragraph, it is necessary to understand in detail what these two interest rates are.
What is TAN
The TAN, or the Nominal Annual Rate, is the percentage of pure interest applied to a loan. This indicates how much the service received will actually be paid, which in essence is the cost of borrowing a given sum of money.
What is the APR
The APR is the Annual Global Effective Rate, also known as the Indicator or Synthetic Cost Index. This represents the actual cost of the financing that will have to be borne by the customer and which varies according to the credit institution to which we turn. Therefore, the ancillary expenses of the loan are included in the APR calculation, including:
- State stamps
- Compulsory insurance
- Collection fees
- Charges for current account support (if applicable)
- Preliminary investigation costs
Non-compulsory insurances are billed separately. In conclusion, simplifying as much as possible, what interests the consumer is that the APR is the percentage value that best represents the total cost of a loan, mortgage or loan. The APR is essentially the sum of the TAN + the charges and costs associated with the loan. So, to choose the best loan among the many offers available today, the percentage of the APR is the reference value to keep an eye on . The lower the percentage, the more convenient the loan for those who request it.
Examples of zero interest loans
In spite of what is commonly thought, a zero interest loan does not necessarily contemplate the zeroing of both interest rates, but only one, the TAN, which represents the lowest percentage. On the other hand, the two indices are zeroed when the loan is at a real zero rate.
In a zero interest loan , the borrower will have to repay the lender the full amount of the borrowed amount plus the APR . So the only interest rate really zeroed in this case is the TAN, which as mentioned above is the actual cost, protracted over time, of the sum of money borrowed.
The real zero rate , on the other hand, is the one in which both the TAN and the APR have a percentage equal to 0% . In the latter case, one might ask the credit institution what it earns in lending us the sum of money. The answer is simple, if TAN and APR are zero, it means that the end customer is only required to repay the amount of money borrowed, but that someone else will pay the APR for us. In this case, it will be the one who sold us the good or service who will take over the interest due to the credit institution, perhaps giving up part of his earnings.
Let us now give some examples of zero-interest financing, made available to customers by Euronics, Hyundai and Ikea, which differ slightly from each other, in order to further clarify the topic of zero-interest loans.
To guarantee the real zero rate, the Euronics amortization plan must respect very specific parameters. In fact, regardless of the asset that will be purchased, the loan will always last 20 months and will start from $ 99. Consequently, it will not be possible to choose the amount of the installments, which will vary only with respect to the cost of the goods purchased. Furthermore, offers such as “ 00Tasso transaction ” have a limited duration in time. Taking for example the purchase of a TV with a cost of $ 1,980 , we will see that:
- The monthly payment is 99 $.
- The loan term is 20 months.
- The TAN and APR rates are both 0%.
- The total to be refunded will be $ 1,980 which corresponds perfectly to the value of the TV.
- This means that the transaction for the customer is at a real zero rate and that Euronics will take over the APR.
In addition to the time limit, the offer can only be used in the event of an exchange or scrapping. The value of the Hyundai Tucson car is $ 18,500, with an expected advance of $ 8,100. In this case the amortization plan will be managed in this way:
- The monthly installment is $ 0 and a final installment of $ 11,000.
- The loan term is 24 months.
- The TAN and APR rates are 0% and 0.17% respectively.
- The total amount to be refunded will be $ 11,036.50.
The 0.17% of APR includes the costs of collecting the final maxi installment, the production and sending of the contract confirmation letter, the annual periodic communications and the substitute tax. To the refunded sum we will also add the sum of money resulting from the exchange or scrapping, which however does not directly affect the customer’s pockets. As it is easy to see in this case we are faced with a zero interest rate loan.
In the latter example we will see a third case which differs slightly from the previous ones. The funding starts from a minimum base of $ 99 up to a maximum of $ 10,000. The number of installments must be defined by the customer. Assuming a loan of $ 1,400 divided into 20 installments, we can see that:
- The amount of the monthly installment is 70 $ installments.
- The loan term is 20 months.
- The TAN and APR rates are 0% respectively.
- The total amount to be refunded will be exactly $ 1,400.
In this case, however, IKEA invites attention, since having given greater flexibility to the financing, compared also to Euronics, the group underlines that according to the installments chosen, the percentage of the APR could increase and in that case the difference would be on the customer. Therefore, IKEA’s zero-rate loan could be both zero-rate, if the APR corresponds to more than 0% and real zero-rate where it will be equal to 0%.