by Kelly Ann Butterbaugh
I recently purchased a new digital video camera, ordered new carpet for my living room, and bought the supplies needed to remodel our bathroom. Did I fall into money by receiving an inheritance check or stumble across a great new job? No, I found the beauty in “no interest payments for a year.”
I refer to this plan as “Beauty and the Beast.” The beauty is that I receive many new items now without paying a cent. The beast is what happens if I don’t pay for my items before my grace period expires. Why then did I go this route? Because I can budget and get the best out of the beast.
The Beauty
Many companies offer a plan of payment in which there are no payments and no interest added for six months or even a year. Usually, one has to apply for the store’s credit card in order to qualify for this offer, but there’s not much more to it than that. If done correctly, this is the perfect way to pay in installments without paying any interest, a way that is impossible if the balance is put on a typical credit card.
My method is this: I know how much “extra” money I have each month. This allows me to divide the cost of my purchase into monthly payments. If I can afford those, I can cash out on the beauty aspect of the store’s offer. If I can’t, then I’m headed for trouble. For instance, the carpet I recently ordered was offered with free financing for twelve months. If I divide up the total price, I need to pay $92 per month in order to have the carpet paid off by the time my free financing ends.
There are two ways to do this. One is to pay the $92 per month until my purchase is paid in full. The other is to accrue $92 in my savings account until the entire amount is present and then pay the bill in one lump sum. This way allows me to earn some bank interest on my payments until the item is paid.
The Beast
Companies aren’t handing out cash just to be nice. They’re earning interest on these plans—high interest. It may say “interest free” but every month interest is added to the account, building interest on top of the previous month’s interest. This is accrued interest, and if you don’t pay for the item in full by the end of the promotional period, all of the accrued interest for the entire length of the plan gets added to your bill. This could equal hundreds of dollars in interest.
What isn’t understood is that although it says interest free, your interest doesn’t begin the month that your interest free term ends. It’s actually been there all along. Even if you pay most of the loan but not all of it, you still get the total amount of interest added once the financing period is over.
The bigger part of this beast is that the interest rates on such payment plans tend to be high. In my case, they’re much higher than the interest on my bank credit card, and I can’t choose what items to pay off first. The company applies my payments to the promotional offers of their preference, sometimes paying off the longer free financing offer before the shorter offer. The trick is to only accept one promotional offer at a time per company.
Another problem is that people overextend themselves. It’s easy to forget about a bill for a year and then purchase something else, leaving a person with two bills at the same time. What’s easier to do is purchase many items at once, all on free financing, and “push off” the bills. Eventually, those bills will arrive, and the amount which has been financed is beyond the budget. A person has to know his/her budget’s limitations when entering into this type of financing or disaster could ensue.
Wrap Up
Financial advisors caution about the free financing pitfall. Their advice is to put the $92 in the bank each month until I’ve accumulated enough to pay for the carpet on my own. While this idea reflects the way our grandparents purchased items, it’s not always realistic in an economically constrained world. Dryers stop working and water heaters leak unexpectedly. For these times free financing offers are a reasonable way to create time payments without adding interest.
While this plan can be beneficial, it should be entered into carefully. Plan what you can put away and stick to it. If you’re not one to stick to your plans, or you’re a procrastinator when it comes to saving money, avoid playing the game of Beauty and Beast.
