The Ugly Truth About No-Interest No-Payments Offers
Have you ever wondered how retailers can possibly afford to offer the no-interest, no-payments, no-money-down kind of deals you see advertised? That was the subject of a question I received recently.
Dear Mary: There are several appliances, electronics, and furniture stores in our area that run television commercials offering nothing down, no interest, and no payments until 2026. It sounds like I can just walk in, take what I want, and not pay for three years! How do these companies really make money? Kate
Dear Kate: First, these offers are on approved credit and come with a lot of other fine print. You need pristine credit to qualify for those attractive terms.
Good luck qualifying
One retailer told me only about 25% of the people who apply for these amazing no-interest, no-payments offers, designed only to get buyers through the door, can actually qualify. The other 75% are offered some other deal with horrible terms. People often accept these terms because, by the time they fill out the paperwork, they’re so emotionally involved and have their hearts set on that “free” absolutely awesome deal, they’re anxious to sign anything.
Terms and conditions
Let’s say you’re one of the 25% and you qualify. You have $3,000 sitting in the bank. Now you could pay cash for that 65-inch Class 4K Ultra HD OLED TV. Instead, you decide to go for the nothing-down deal so you can earn interest on your money until 2022. Furthermore, you still have to fill out and sign a credit application. And that requires a credit check. Finally, you have to agree to very steep interest (plan on 24.99% or more), which is deferred (not waived) until 2022.
Fine print
Furthermore, the contract will read that if you are late paying that entire balance in full by the specifically appointed time on a certain day, you lose your deferment and you owe interest back to the day you signed the contract. From that moment on you must begin making enormous payments.
Whenever you sign a contract or application of any kind, remember this: What the large print giveth, the fine print taketh away.
Ugly truth
Most noteworthy, about 78% of the people who qualify for these deals do not pay the account in full at the appointed time for whatever reason. Life happens. You use the money in the bank for some other more urgent situation. That means now you’re stuck with enormous payments plus all the deferred interest on that TV (or another item) that, is by then, no longer new and worth much less than it was the day you thought you got such a steal.
Better idea
My advice? Don’t even think about these kinds of come-ons. If you can afford it, pay for it, in full. Now you own it. And if you can’t afford to do that? Then make payments to yourself until you save the full amount.
Discipline and delayed gratification are still excellent character builders.
Hope that helps!
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We used this type of financing when we had to replace our ac/furnace. We divided the amount into monthly payments and sent the payment into the company each month. We consider that monthly payment a required part of our budget. It allowed us to replace our air and heat when we didn’t have the finances saved in our emergency funds. It will be paid off in August of this year, a month ahead. You do have to be diligent and able to manage your money but it does work for some. On the other hand…we prefer to save up for smaller expenses. For instance, we just purchased two water heaters. We were able to save up because we still had one working heater. For this expense, we saved up until we had the money to replace both.
I’ve wondered if there is any penalty for paying it off early?
No. Prepayment penalties are typically found in mortgages, never in consumers loans and credit card balances.
No, not in my experience. If you are paying both interest and principle, make sure any extra you pay goes toward the principle. It’s not automatic; you have to specify that’s what the extra money is for.
I agree – those deals usually involve more in trouble and unknown details (unless you add another 30 minutes to carefully read that contract) than it’s worth. Consider a $4000 purchase with 1 year of no interest. The bank would pay me less than $1 to hold that money in the bank one year. Which is far less than the cost to me of reminding myself to pay off that money in a year, and it’s not even worth the time to write a check, put on a stamp, and send it in.
It’s so much easier, and far less worrisome to save for what I want to purchase and then buy it. Plus, I save a lot of high interest rate payments, by not borrowing and not paying interest.
I have qualified for this type of financing as one of the 25%. What we do is take the total and divide it by the number of months that the contract is for and make that payment every month, thus when the time is up it is paid for. Works for us.
I think this works if you are good with managing your budget. You also need to know the company. We regularly use Home Depot for season building materials. We do the repairs during the weather that allows for projects and take the balance and divide it by the number of months minus one. I’ve been as to buy hot water heaters, pellet stoves and house insulation that way.
Good for you! Beat ’em at their own game. You are definitely in the minority.
we too, have been using these deals, and also your very same payoff idea. we have paid off houses by doubling up on payments and/or making an extra 2 or 3 payments annually. works for us too. all it takes is discipline.
We do exactly the same, but divide by one less month so we are paid off at least a month before the due date. Set up automatic payments so you never miss one. We have done this for everything from furniture to flooring over the last 10 years at least. We have never been late and had to pay finance charges. It takes discipline and diligence, but it can work. One note: Rooms To Go once lowered my automatic payment amount near the end of my interest free period without notice or my permission. It would have caused us to not be paid in full by the due date, had I not caught it. You MUST review every statement to make sure payments are credited on time and in the correct amount. This is where the diligence part comes in to play. I prefer paper statements for this reason.
Capitol One credit card plays those same games. Even when we paid off the amount stated on the statement, they tried to hit us with an extra $25 “closing fee ” I became very angry and insisted on speaking with a manager. Finally, the bogus charge was removed. If you pay off a loan over the phone, make sure you get something in writing stating that the loan is paid in full. You can also contact your state’s attorney general and tell them your problem. You’d be surprised how quickly businesses respond when the ag gets involved.
Thanks for the heads up on Rooms To Go lowering your automatic payment without your consent. I did not know a business could legally do that.
I very much doubt that it is legal.
I also think there is a difference between using it for the things you need, rather than want. In our project for our grandson, we used the cash reserve to buy appliances and furniture used from individual sellers and bought the things we wanted new and under warranty for safety issues.
I am also one of the 25% that qualify for this type of financing. What I did was divide out the total amount I owed for the emergency new refrigerator by 2 months less than the time I was given and set up an automatic payment monthly. So I not only paid on time but I also paid it off in full two months prior to the deadline so no opps on my part or nasty fine print on their part.
As a number have said here, we have used such plans successfully. I take the total and divide by at least one month or two less than the agreement so things are paid ahead of time. If I tried to put the money aside, I’m afraid it would get spent on something else. Just the way my mind works. This way we have the item and it improves our credit score to pay things off early. We only do one of these types of payments at a time though. Don’t want to get in over our heads. We just paid off a car early due to a monetary gift from my mom. We are now putting the “car payment” into a “car down payment” savings account. Love watching that balance grow knowing it will cost us less in the long run for the next car. 🙂 Thanks Mary for teaching me to have my money work for me instead of the other way around.
I have used this method to by several items for my home (furniture, stove, watch). Ben Bridge actually made my monthly payments due on my watch to be paid by the due date. They are one of the few companies who want you to be able to fulfill your interest free loan on time. I also hate giving any business interest including the banks. We were able to pay off our house 11 years early..it is amazing how much the interest for 11 years is.