Zero Percent Loan Same as Cash?

A couple months ago I was talking with my neighbor about some purchases I was thinking of making because of the zero-percent financing that was available.

He said, “That’s great, man. If it’s zero percent, that’s the same as cash.”

In a way, it is.

Getting a zero percent loan and making payments against it is the same overall effect as saving that money up and spending the lump sum down the road.

Yes, you may lose out on interest from your savings… so you might argue that you’re losing money by taking the debt.

But on the other hand, inflation greatly outpaces the interest rates offered by banks. The more money the Fed prints, the faster prices rise. This process discourages saving and encourages borrowing.

With a zero percent loan I can borrow money today and pay back the amount borrowed with less valuable money. Yes, I’m paying back an equal amount of dollars, but each one is worth less (or has less purchasing power) than it did when I borrowed the money.

So in a very real sense, a zero percent loan is not the same as cash… it’s actually better than cash.

This is the kind of world most of us live in, particularly in America where the printing presses never stop running. It’s a topsy-turvy world where what should make sense (saving) doesn’t make sense; and where what shouldn’t make sense (borrowing) does make sense.

Thoughts? Leave a comment below.