Editor’s note: This article was first published in October 2013. It describes Spanish bank loan advertising of that month, including 0% loans repayable in 6 or 10 instalments, insurance at about 10 euros a month and a 5% rate called normal. Fees and typical rates have changed since.
Banks’ shop windows are once again advertising 0% interest loans, to be repaid comfortably in 10 or 6 monthly instalments. It is very eye-catching, and even if we don’t need it, why not take some free money?
If we start from one of humanity’s fundamental principles, “nobody gives anything for nothing, and nobody risks anything for nothing”, it is clear that if someone lends us money, it’s because they’re going to make money from it. All the more so when we’re talking about banks.
These loans usually carry what we might call “hidden costs” or “disguised interest”, with one type or another applied depending on the customer’s profile. One way or another, to get a 0% interest loan, there are requirements.
(Read: The dangers of quick money with nothing but your car as collateral, or…)
If we look at the small print, in some we’ll see an opening fee of x%, or a study fee of X euros, or both.
In others, there’s no study fee or opening fee, but with some smooth talk the customer has to take out life or accident insurance where “you’ll only have to pay about €10 a month”, which comes to about €120 a year, plus, in some cases, opening a pension plan or paying around 100 or 150 euros into an existing pension plan.
In any case, if you apply for a 0% interest loan of 5,000 or 6,000 euros, you will never receive the full 6,000 euros, because there will always, without exception, be some cost. Once you know what that cost is, turn it into a percentage and you have the real interest rate on that supposedly 0% loan.
Of course, this doesn’t mean that the conditions on some of these loans are bad; with some of them we might be talking about 5% interest, which is within the normal range. But at least we go in knowing there’s 5% interest, not 0%.
Further reading
- Inflation, money and wealth
- 7 psychological reasons why smart people do foolish things with their money
- The magic of compound interest in fixed income and equities
Featured image: unknown author, CC0 1.0, via Wikimedia Commons.
