1) If a 0% Interest Financing for 6 Months purchase is not paid off in full at the end of the month period, on what amount is interest charged on?
The original amount financed
i Only the remaining balance
The remaining balance plus a penalty fee
di None of the above
The Correct Answer and Explanation is :
The correct answer is:
ii) Only the remaining balance
When a 0% interest financing offer is used, it typically means that, as long as the balance is paid in full by the end of the promotional period (in this case, 6 months), no interest will be charged. However, if the balance is not paid off in full by the end of the financing period, interest is usually charged only on the remaining balance, not on the original amount financed.
Explanation:
Zero-percent interest financing deals are often used to encourage consumers to make large purchases without paying any interest if the debt is fully settled within the promotional period. The purpose of such an offer is to reduce the initial financial burden of the purchase, making it easier for buyers to afford higher-ticket items.
In these types of offers, the key factor is that interest is deferred for the promotional period. If, for some reason, the buyer does not pay the full amount before the period ends (e.g., they still have an outstanding balance), interest is charged starting from the balance remaining after the promotional period has expired. The interest rate, which is usually specified in the contract, will apply only to the remaining balance at that time, not to the entire original amount financed.
The reason the interest is charged on the remaining balance and not the original amount is that the seller or lender recognizes that the original agreement was to allow the full payment within the promotional period. If the full amount is not paid off, it’s only fair to charge interest on the portion that still remains due rather than on the entire sum.
For example, if you originally financed a $1,000 purchase and after 6 months you still owe $300, interest would be charged on that remaining $300, not the full $1,000, since that was the amount that was not paid off by the end of the promotional period.
Would you like me to generate an image to visualize this?