On three recent occasions, I’ve been offered interest-free loans. The first was when I had my house furnace and air conditioning system replaced. The cost was significant and the company doing the work offered to give me an interest-free loan if I wanted it. However, when I compared the total costs of the two options (paying in cash vs. signing up for the loan) I saw that the interest-free loan option costs $428 more. When I asked about the added cost, the salesman told me it was the fee for the loan. Even though he was straight-up with me about this, I thought it was deceptive that the loan option costs so much more than the cash option. Technically, it is indeed an interest-free loan. However, the fee more than makes up for the free interest.
The two other occasions were those extra checks banks send you if you have credit cards through them and have good credit. The checks offer “no interest” on the amounts they are made out for, and for a specific duration – say 14 months. Each check/transaction, however, cost a fee of 3% of the amount of the check. So, if I wrote a check for $1000, I would pay $30 for the use of the money for 14 months.
If you’re thinking what I’m thinking, these “deals” are nothing other than taking what used to be called the interest charge and instead calling it a loan fee. Worse, it ‘s collected upfront. So why would any seller or retailer what to play this fee-vs-interest name game? I think the answer is they want to advertise an interest-free loan. That way people who aren’t paying close attention can tell friends and spouses how savvy they are by getting an interest-free loan.
A reason I’m writing this essay is because it illustrates the power of words. It also illustrates how easy it is to latch onto a catch-phrase and jump to conclusions. In my decades of experience, most banks have always charged fees for loans; it is a standard business practice. The thing is, back in the day, those fees were modest relative to the size of the loan and the interest charged (house mortgage loans being an exception). I’m talking maybe $5 or $10; that was like 0.25% or so of the loan amount.
I think years from now companies will be advertising no-fee loans because that will be the catch-phrase then. Somehow, if they do I suspect there will be interest charges buried in there somewhere – maybe in the fine print.