Beware the Promise of “Interest-Free” Purchases
Have you ever been tempted to take advantage of an interest-free offer from a retailer? Just think… You’ve saved and saved for that new bedroom set, and now they’re offering you a chance to leave that money in your high-yield savings account so you can keep earning interest for 12 (or more) months while enjoying your new furniture. Sounds great, right?
Well… Maybe. While these “same-as-cash” offers can be a great way to save a few bucks on your purchase, you have to be very careful not to trigger an avalanche of interest payments. As it turns out, most of these offers have an extremely high interest rate (upwards of 20% or more in many cases) that is simply being waived if you pay it off during the interest-free period. But if you don’t kill off your debt, you’ll likely end up on the interest that has been accruing over the full period.
Consider the following… You make a $3,000 purchase under a 12 months, same-as-cash offer. At the end of twelve months, you’ve nearly paid off the full amount. You only owe another $200. No big deal. Even though it’s 20% interest, your balance is only $200, and it won’t take long to kill it off. Right? Wrong.
In most cases, failure to pay off the debt in full during the interest-free period means that you’ll wind up paying back interest equating to 20% on the full amount. Not such a good deal now, huh? Moreover, in many cases this interest avalanche can be triggered by a single late payment during the interest-free period. Thus, even if you fully intend to pay it off before the interest kicks it, it’s still possible to get caught unaware and wind up paying through the nose.
As with anything, be 100% sure to read the fine print.
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I wish they would start teaching this in some of the schools. There are just too many people who dont understand the fine print, want their goods now, and then in a year end up getting socked with 12 months of back interest because they didnt realize they had to pay it all off.
Comment by Tim — Apr 27th 2008 @ 6:02 pmYipe!
I use those plans whenever I can with big-ticket items…but not unless I actually have the money in hand. Then I put the money in an account that will make something but is low in risk, and mark the payoff date on not one but two calendars. The payoff date is one month before the bill is actually due.
How can there be a late payment during the interest-free period? The deal is, you don’t have to make ANY payments during the interest-free term. So…you can’t have a late payment if none is due.
If making a payment, not a payment in full, during the period that the company represented as interest-free somehow triggers an interest charge, it’s time to go to the state attorney general’s office. That pretty clearly is some sort of fraud.
Comment by Funny about Money — Apr 28th 2008 @ 8:55 amIt depends on the offer… Some are no interest, no payments for a set period of time (though you still have to pay it off before the end or you get hit for back interest). For others you have to make a minimum monthly payment, but there is no interest as long as you: (1) pay on time, and (2) pay it off before the promo period ends.
Comment by admin — Apr 28th 2008 @ 8:57 am