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I am able to get a zero interest loan (APR 0%) of €10k for my small business and I have to decide the debt repayment period (12-60 months).

Mathematically, because interest rate is zero I should choose the maximum period but I feel worried because it seems too an easy choice. What could be downside risk of this?

Let’s assume I can repay it in full in 12 months. Straight line monthly amortization schedule.

  • Better to pay the loan off slowly and invest the money you would be paying in interest. – James McLeod Apr 15 at 2:04
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    Make sure it is 0 interest FOR THE WHOLE TIME. Not like "0 interest for 3 months". Because this is what they normally are. OBVIOUSLY - 0 interest = max length possible because there is no penalty for time with a 0% penalty per year, but normally they are time limieted 0%. – TomTom Apr 15 at 6:31
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If you have a zero interest rate, then the only reason to pay back a loan sooner than later is if you expect a negative inflation rate. If you suspect that the inflation rate of your currency will go negative in the future, then having a loan is bad because even though its numerical value doesn't increase, its actual value does.

But if you do not expect that, and with everything else being equal, pay back your loan as slowly as possible.

When a company runs a profit, then there are usually much better things to do with that money than just to pay back loans early. Invest it into growing the business or just pay it out to the owners.

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  • "Invest it into growing the business or just pay it out to the owners." But make sure the business remains sufficiently capitalized, right? Leaving a company insolvent because of excessive payouts to the owners is a no-no (abuse of limited liability). – nanoman May 15 at 20:57
  • As I said: when the company runs a profit. Putting your company into debt by paying you a bonus is of course illegal (unless you are a too-big-to-fail corporation). – Philipp May 25 at 12:36
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Pay it sooner.

It's a selling tactic and not everyone will qualify for 0% interest for the simple reason that the term is usually 36 months or less and not everyone has room in their budget for a large payment. That then moves to different rates and different terms.

If you don't pay on time there's a stated percentage compounded from day one which goes for downfall on such a deal.

BOTTOMLINE

Pay it sooner and avoid a long loan period it's risky.

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There isn't much downside. 0% loans do exist, and when you get them they are glorious. The good ones are almost always a promotion to earn your business. New cars and credit cards are a perfect example. With rare exception, pay the minimums for as long as you can even if you have enough to pay them off in full. Take that money and park it in an interest bearing account or invest it if you wish.

As an almost funny aside, I'm currently 2 years into a 63 month 0% loan on a new car I purchased in 2018. When I bought the car I was trading in another (that I was also slow-paying due to a low 0.9% interest rate) and I had $5K in equity. The finance manager told me I was approved for the 0% rate, and asked me how much of the difference after my trade I wanted to finance. The car I was buying was $22K, and I said I'll finance the max he'll let me. He said he needed a number, so I said $50K. He kind of looked stunned and then smiled as he realized that I was trying to maximize the 0%. I said he can just buy my trade, then offered $500 down, so he cut me a check for $4500 and gave me my new car.

In the car sales example, the main downside of a 0% interest rate happens before the sale. A 0% finance rate has a measurable cost to the bank, which they may be willing to return to you if you don't take the special rate. Car manufacturers almost always offers 0% financing, or something else, typically in the form of cash back. The cheaper the car the more likely you should lean towards the cash instead of the low rate, but you can run the numbers both ways. In my case I think the cash offer was $1000, which compared to the alternative rate of 3.9% was not as attractive if I took the loan to full term. If I paid the loan off sooner the cash would have been better, but I preferred to utilize the money elsewhere. After the sale with your 0% loan in hand, slow pay it unless some contrived circumstances crop up where you wish to minimize your cash (divorce maybe?).

Another possible downside, though admittedly easy to mitigate, is that your debt to income ratio will be higher when you apply for future credit while the loan is active. But if you're choosing to purposely slow pay a 0% loan and you find yourself in a scenario where your DTI affects your ability to get a loan, you could simply pay off the 0% loan at any time to fix it. But even then, you'd probably be better off taking that extra cash and reducing the new would-be loan by the same amount instead, since presumably it would be at an infinitely higher interest rate than 0%.

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I would suggest you to avail the maximum length possible, but, pay it sooner. Choosing longer duration gives you a leeway, in case some uncertain thing comes in the way to paying the payment.

Being debt free is one the best things for anybody, be it business or person. Even though you have longer duration, try to pay off as early as possible. Also, see if there are any pre-closure penalties.

Once you pay off loan, you will have more cash flow for your business and you can take further steps.

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    I think your last part does not make sense. If you pay off the loan early, your cashflow may be larger, but your liquidity will be smaller. You make investments (further steps) with liquidity! – Daniel Apr 15 at 12:44
  • What I feel is, there should be a balance between debt payoff and liquidity, so that business does not fall in to debt again. Once the debt payoff is done, more cash flow(due to not having debt) will lead to more liquidity – Venkataraman R Apr 15 at 13:43
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    @VenkataramanR "Feelings" aren't that relevant in business. Companies need liquidity and operative capital in their startup phase. The lower the fixcost for debt repayment the better. And there is little advantage for a company to be debt-free as long as the bottom line of the financial statement is still positive. Especially during a zero-interest period, where taking and repaying debt is really just shoveling money back and forth between assets and liabilities. – Philipp May 15 at 13:41
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Another reason to consider avoiding a long loan period is the risk that comes with loans in general. As long as you have debt, unless you are holding enough cash to pay it off at any time, then you have the risk that one day you'll have a payment due, and not enough money to make that payment. If you don't have a loan, then you don't have those constant payments to worry about; it's one less thing that will be a problem if some day you have no cash on hand for a time.

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