Disclaimer

This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Tuesday, December 2, 2008

No money down, no interest, NO WAY

Posted by Matt

Let me share a brief story about a family member who asked me for input on the purchase of a new laptop computer. She found a no down payment, no interest deal from a major electronics store in our area and wanted to know if I thought it was a good deal. I checked it out and it was a nice machine for a great price, but I had to take issue with the deferred payment plan.

First of all, I couldn't determine the exact rules of the deal, even after reading the fine print. The ad banner said no interest, but sometimes this actually means "no interest if you pay the debt off by a set deadline, otherwise a ridiculously high interest rate is retroactively applied for the interval between the purchase date and the deadline." I'm paraphrasing here.

I asked "If you don't have the money to buy the computer right now, but you think you'll have it by the deadline, why not wait and save up?" The answer was along the lines of "why wait, when I can have it right now?" I could only caution about unexpected financial emergencies.

My wife Leah added a final argument against the deferred payment plan that she heard about when listening to Clark Howard on the radio: they can drag down your credit score! If you're not familiar with credit scores, one of the big criteria used is how much credit a person is using compared to how much they have available, and deferred payment plans show up as accounts with 100% utilization (aka "maxed out"). Clark warns:
You may find you'll get higher interest rates when insurers check credit scores or even lose job offers if employers check scores.
Ideally, I think people should keep cash on hand in savings accounts for purchases like these. I'd even consider taking money out of an emergency savings account for an expense like this (rather than a deferred payment plan), as long as the withdrawal would be a relatively small in comparison to the savings balance and I felt I would be able to replace it quickly.

I also encouraged my family member to consider what other options were available. I suggested that she share her spouse's laptop for a while, start saving, and watch for even better sales after the holidays. I think she is going to give this a shot and who knows, sharing a laptop might end up being the best solution for the long term.

If you find yourself contemplating a deferred payment plan, ask yourself these three questions:
  1. Do I have to make this purchase right now?
  2. Is it worth the extra financial risk and the negative effect on my credit score?
  3. Do I have any better options?

If you ask me, the answer to #3 is always yes.

2 comments:

Paul said...

I once bought an appliance from Sears and they had a 180 days same as cash deal. It was something like you buy it now, and you don't have any interest or payments for 180 days. I decided why not?

Well it was one of those deals where if you don't pay it off in those six months the interest gets applied retroactively. I knew this going in, but I thought it was a smart decision.

I actually had the money, but I decided to hold on to it for six months and take advantage of the interest and THEN pay it off.

Well it worked, but barely.

Of course they don't send you anything that says: "You have X more days before we hit you with all the interest." and it's amazing how easy it is to lose track of it and just forget it. I almost got hit with all the interest but at the last minute I remembered my deadline and paid off the debt.

So what did I get out of it?
6 months interest on the money and the decision that the risk was totally not worth it. That was the last "X days same as cash" deal I ever did.

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