Sunday, December 2, 2012

I hate 0% financing from retailers

I hate financing.

Don’t get me wrong; there are certain things that may need to be financed, such as a mortgage, a new vehicle, or starting a new business.  I’m fine with that.  These are things that are very difficult to save up for and pay completely at once.

For everything else, I hate financing.

This holiday season, there will be plenty of 0% financing deals out there.  Retailers want to boost sales and interest rates are low.  If you’re out shopping for something big like a new television, you’ve probably already been offered a deferred-interest or 0% APR offer.

“Buy now, pay later!”

“Own this $1800 LED 60” television for only $150 a month!”

How great does that sound?  Financing lets you own much more than you can afford at once.  Retailers sell you on the monthly payment, and not the total cost of ownership. What you don't realize with a 0% finance offer is that you are likely getting a store credit card.
Financing can affect your credit and lower your credit score by:

1. Increasing your credit utilization.  Depending on how much you are financing, the store credit card will often loan you the exact amount of your purchase, which maxes out the credit limit on that account.  Remember that 30% of your credit score is based on your credit utilization.  This new credit line will be maxed out at 100% utilization starting the first month.
2. The new hard inquiry to open the credit line will drop your score by a few points.
3. New account will lower your average age of credit accounts.  15% of your credit score is based on the length of your credit history.

If I’m going to get a hard inquiry for new credit, I’d rather open a new rewards credit card to get a big sign on bonus instead of a store credit 0% financing offer.  Often times opening a new credit card will increase your credit limit, lower your utilization, and increase your credit score.

Here are the common mistakes that may happen when you take one of these 0% financing offers:

1. Discipline. You likely don’t have the discipline to divide up your monthly payments equally
2. Making only the minimum payment.  You may be tempted to only make the minimum payment each month, with the “I’ll pay off the rest of the debt later” attitude that could get you into costly financial trouble.
3. Financing too much.  If you take too many of these 0% financing offers all at once, your lowered credit score could hurt your chances of getting better interest rates on much higher ticket items such as a new home or vehicle (things financing are acceptable)

4. Unexpected emergency.  You may start off with the intention to pay off your loan on time, but an unexpected emergency can occur and you may no longer be able to make your payment.
5. Missed payment.  If you miss just one payment, you may lose your promotional 0% interest rate and have an interest rate spike (up to 29.99%) plus interest rate added to the bill (that was previously deferred).

6. Miscalculating interest rates.  Most people think that a 0% loan doesn’t have any interest until the end of the promotional period.  Often times that’s not true.  0% financing offers are actually “deferred interest promotions” since interest charges actually start to accrue the first day of your purchase.  As long as consumers make the minimum payment each month, the bank will waive the interest payments.  If the entire balance is paid off prior to the promotional period, then no interest is charged.  However if the promotional period ends and there is still a balance, then you get slapped with this accrued interest added to your balance in a lump sum.  AND you get an increased interest rate for the rest of your remaining balance.

Here's my story:

2 years ago when I first moved into my home, I wanted to get a new bed.  My old bed was just fine but I told myself that I deserved a new bed.  For me, the appeal of a Tempur-Pedic bed was too much and I thought I had to have it!  The saleswoman at Sit ‘N Sleep convinced me that I could afford this $3666.28 bed with no money down and payments of about $153 a month with 0% financing for 2 years.

I didn’t want to spend $3,666.28 all at once for a bed, so I took the 0% financing offer.  Luckily for my finances, I was disciplined enough to pay off the full balance with small monthly payments.  For the last 2 years, I’ve been making a payment each month of ~$153 to pay off this debt.   There were times when I could have paid off the debt sooner, but I already took the loan and I took advantage of the 0% deal for the promotional period.

I’m happy to report that I FINALLY paid off this damn bed last month and I have learned my lesson about 0% financing:  never again.  
Next time I want a new bed or a new television, I will set up a targeted savings account and pay into it each month until I reach my target.  Then I will charge the full price of the new item on my rewards credit card (to get the rewards, benefits, and protection)… and immediately pay off the entire balance with money from my targeted savings account. 

My advice about 0% financing:  Save up the money and buy something when you can actually afford it.  Having a separate targeted savings account is the best way to meet your savings goals.  Spend money that you have, not money that you intend on getting in the future.  You’ll be much happier with your purchase, and I’ll be proud of you.    

1 comment:

  1. Considering how money changes hand so quickly and how the chance that the money won't actually get into your hands is really high, I guess it's just logical to try as much as possible to stay away from purchasing things until you get the cash. A direct purchase seems more profitable these days, not to mention a lot easier on the pocket.


Comments? Questions?

Related Posts Plugin for WordPress, Blogger...