One of the staples of our consumer culture is the “special financing” deals. You make a large purchase that you can’t afford, and the retailer offers you a financing deal.
Usually, you pay 0% interest, or “same as cash” for anywhere between three and 12 months. It seems like an easy way to afford something you wouldn’t otherwise be able to, without having to worry about interest. But is it a smart financial move?
Before you get too excited about such an offer, it’s important to understand whether or not you are dealing with deferred interest.
According to a recent study from CardHub, a number of retailers offer deferred interest financing, and that could come back to haunt you if you don’t pay off your loan in the designated “same as cash” time period. Here’s why:
What is Deferred Interest?
Basically, deferred interest is when a retailer applies interest retroactively to the entire amount of your purchase. This can happen if your balance is unpaid at the end of the introductory period, or if you miss a payment and forfeit the special financing offer.
For example; if you finance a $1,500 TV, and sign up for the six months “same as cash” deal, you have to pay off the balance within that time frame. If you don’t, the retailer can charge your account what you would have paid in interest over the six months on the full purchase — even if you only have $100 left to pay at the end of the six months.
There are also plans that trigger the deferred interest if you miss one payment, or if you pay late once.
If you’ve made no payments at all (if you are on a “no payments for x months!” plan), then the interest charges can be even higher. It can be quite the surprise at the end of the intro period to see how much you owe in interest, and to start making regular payments.
Deferred interest isn’t an isolated event, either. The CardHub survey finds that 50% of the retailers who offer financing options to their customers use deferred-interest plans. So there is a good chance you’re already dealing with one of these plans.
Avoiding Deferred Interest
Of course, the best way to avoid falling into the deferred interest trap is to forgo borrowing altogether. Instead, save up for major purchases ahead of time so you don’t have to worry about special financing. It’s better to avoid debt when you can.
However, if you do end up taking advantage of special financing, make sure you’re clear on the terms of the arrangement. Make it a point to put together a plan that allows you to pay off the loan within the special financing time period. And then do whatever you can to stick to this repayment plan.
Special financing can be a cash flow strategy for some consumers, but it backfires when deferred interest comes into play. Put together a spending plan that keeps you from missing any payments, so you pay off the debt at least a month before the special financing period is over.
Carefully consider any purchase before moving forward, especially if that purchase involves special financing.
Do you have a personal experience with special financing offers? What’s another drawback to using them?