Homes
Lessons From a First-Time Home Buyer: A Warning on “Interest-Free” Home Repair Financing
The unfortunate fact about being a homeowner is that, at some point, you’re going to have to pay to repair/replace some expensive items in your house. And while you should try to be as prepared for that as possible, in reality, there are times when an unexpected repair may mean needing to request financing. That way, you can pay off the purchase over time rather than shelling it all out upfront. What’s more, some financing options may offer “interest-free” financing for a certain amount of time. However, before taking them up on such deals, there are a few things you should know.
What to Know When Taking Out an “Interest-Free” Home Repair Loan
Our home repair financing situation
As I recently shared, we had to replace our water heater a few weeks back after our old one failed. At a cost of about $2,800, paying for the repair outright was a possibility… but, seeing as we’ve only been in the house a few months and are still building up our savings after buying the place, having a bit more time to pay it off was definitely an appealing prospect. Luckily for us, the service we went through offered a “six-month interest-free” option, which we took.
The real terms and cost of our loan
While I’m referring to this loan as “interest-free” and the terms as being “six months,” that’s actually far from the truth. In reality, the loan APR is 15.49%. And the length of the loan? 10 years!
That’s right — while I do have the option to pay off the repair within the six-month timeframe and avoid paying interest, if I fail to do so, then the loan is automatically financed over 10 years. Furthermore, rather than actually being “interest-free,” it’s really an interest-deferred loan. This means that, once the six months are up, if the loan isn’t paid in full, then the interest I would have accrued for those months will be tacked onto the overall total.
So, how much would I end up paying if I did pay off the loan under the real terms? As the lender breaks it down, the loan would consist of 119 payments of $49.46 plus one payment of $48.46. If we stuck to that plan, our $2,792.70 repair would cost us a total of $5,934.30. For those doing the math, that means the finance charges ($3,141.60) exceed the principal amount.
No payments – and no reminders
Another aspect of our loan that I haven’t mentioned is that there are also no payments due during the six-month promotional period. That might sound like a good thing — except that it’s solely on you to ensure that you pay off the balance before your regular loan terms take effect. Moreover, the lender let me know that, since no payments are due during this time, they won’t be sending any payment reminders. Again, it’s completely on your shoulders!
To their credit, the lender did call me to 1) make sure I was satisfied with our repair service before they released the funds and 2) go through all of the loan terms with me. This included giving me the specific date that I’d need to pay off the balance by if I wanted to avoid paying interest. So, kudos to them for at least being upfront about it all.
Honestly, I’m very glad that we had the option to finance our home repair and not have to pay any interest. That said, although this option may also be right for you, there are some important things to note before you sign on the dotted line. In particular, you’ll want to ask what happens to your loan after the promotional period. Does the accrued interest get tacked on? What’s the APR? And what are the loan terms?
On top of that, as you strive to pay off your balance before the “real” loan terms take effect, make sure you know exactly when that payment is due and set reminders for yourself so you don’t miss it. You’ll likely also want to ensure that you know how to make those payments and do so early enough that any processing times are taken into consideration. Hopefully, with these few extra steps, you’ll be able to take care of the home repairs/improvements you need, give your budget some breathing room, and avoid paying extra all at the same time.
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