Why a No-Interest Bargain Can Be a No-No
Jaclyne Badal
Feb 18, 2007
Are financing deals that promise "no money down and no interest" a good deal -- or too good to be true?
These promotional loans can actually pay off if shoppers are willing to do their homework, make timely payments and read the contract's fine print, experts say. If not, the promotions are a temptation best avoided.
Customers who aren't careful make the mistake of overemphasizing the benefits of a free loan, says Richard Pittman, housing-services coordinator at ByDesign Financial Solutions, a nonprofit credit counselor in Los Angeles. He says stores often pay for the promotions by boosting prices or delivery fees or selling extras, such as warranties.
Financing deals are "kind of like the sleight of hand with a magician," Mr. Pittman says. "You don't see what's right in front of your face."
Consider a shopper who uses a promotion to defer payments for 12 months on a three-piece Ashley Furniture sofa set, last week listed for $2,381 at one online retailer.
If the purchase price is invested in an online savings account with a 5% yield for a year, it can earn about $120 in interest. But a second store on the Web last week listed an identical set for $1,538. The $120 gain from holding the money for 12 months pales in comparison to the $843 price difference.
And that's assuming the shopper actually had $2,381 to park in a savings account. Many people turn to financing deals because they don't have ready cash available. If that's the case, consumers have the added burden of ensuring they can afford to pay the balance before the grace period ends.
Budget coach and author Judy Lawrence says people often succumb to the belief that they'll "find the money to make it happen, just because they want it so badly." In reality, people are more likely to get saddled with an unexpected bill than to benefit from a windfall.
And no-interest deals can quickly turn to high interest charges if you don't pay on time. The interest rate often jumps to 20% or higher if the loan isn't repaid in full by the end of the initial no-interest period. And the borrower is usually on the hook for interest accrued from the date of purchase -- meaning the no-interest deal essentially evaporates.
Many consumers who miss the deadline find that paying with a credit card would have been cheaper than the "no interest" loan.
"Do the math at home" on what you can really afford, says Zach Vander Meeden, a spokesman for the Better Business Bureau.
Here are additional things shoppers should know:
- Financing promotions are often reserved for customers with the best credit, the California attorney general's office warns. People with good or mediocre credit scores could get into the store only to find that they qualify for a loan with less desirable terms.
- If the loan requires a minimum monthly payment, a single late payment will probably end the promotion and trigger interest charges.
- The promotional period may end on a day that's different from the regular monthly due date. A person who's used to paying on the 20th, for example, could have a grace period that expires on the 12th.
- Finally, the date mentioned in the contract is typically the last day the funds can be received, not postmarked, says ByDesign's Mr. Pittman. "You might plead slow mail, but they have the right to decline."
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