Although the true tightwad saves up money before buying anything, that doesn’t work for most of us all the time. Sometimes, a refrigerator breaks down before we have time to save for a new one, the couch of our dreams goes on sale two months before the bonus check arrives, or a retailer is offering huge loyalty awards for using the store credit card.
Financing is a business proposition for retailers. They are in it to make money. That’s fine as long as you what the costs and the benefits are of the transaction. In a good transaction, receive a fair price and the retailer makes a fair profit. In a bad transaction, you pay far more than you think you’re paying, and the retailer makes an excessive profit by misleading you.
The cost of money is the interest rate, and right now, interest rates are so low it’s almost funny. But like anything, some people will try to get you to pay more than you have to. If you understand how retailer financing works, you’re in a better position to find a good deal. CardHub.com has released its 2013 Deferred Interest Study, which looks at the financing plans offered by different stores. The key point is this: Deferred interest is not the same as 0% financing. With 0% financing, you are not charged interest at any point over the length of the financing. With deferred interest, you are not charged interest for a set period of the financing, but after that, interest may be charged retroactively to the entire balance, and often at crazy-high interest rates like 25%.
If you don’t realize the difference up front, you may be in for an expensive surprise.
Here’s some of what CardHub.com’s researchers found:
- With deferred interest, you have to pay attention to the repayment date. If you are one month behind schedule, even if you make the minimum required payment, your financing cost will balloon.
- 70% of major retailers offer a financing option. The best deals come from retailers that do not use deferred interest, which include Target, Nordstrom, and Gap. The worst deals come from retailers that not only offer deferred interest, but also are not transparent about their policies. That list includes Pottery Barn, Amazon.com, Lowe’s, and Macy’s.
- 41% of the retailers that offer a deferred interest plan are NOT transparent about their policies. Only 29% of the retailers that do offer a deferred interest plan are fully transparent about their policies.
- 31% of the credit cards offering deferred interest are issued by a single credit card company: Citi. GE follows close behind, offering 23% of the deferred interest cards. The issuing company will be listed on the application.
- Despite not having a deferred plan themselves, several retailers offer the ability for consumers to make payments through PayPal, which offers a “Bill Me Later” deferred interest option.
How do you protect yourself? The first is to pay attention! A zero-percent fining offer can be a great way to save money on a purchase or to make an emergency purchase affordable. But only if you know the terms upfront.
If you need to make the repayment in full in order to avoid a finance charge, set up a plan to save up the money as soon as you come home from the store – and start saving. Mark your calendar a month before the payment is due so that you won’t be surprised.
Then, make the payment on time. Doing it online is a great way to make sure that the money gets where it is supposed to go on time. You want to avoid the interest triggers that come with late payment.
Finally, you may be able to avoid financing altogether with the good use of an emergency fund.
If you’re only getting 1% on your savings, there is no reason to give any bank or any retailer a 25% interest rate. That is incentive enough to avoid deferred financing charges.