I’ve noticed lately a proliferation of ads on TV for everything from appliances to carpeting, big ticket items offered at no money down, with no payments for a year (or more) and no interest. It strikes me as vaguely dishonest. How can a dealer in matresses, for example, “give” you a bed for a year without expecting payment (and he delivers!) and without going bankrupt. What’s the catch?
I believe that often times, the catch is that if you DON’T pay it off in time, the interest starts to accrue - BIG TIME. Interest rate of like 22% or something assanine like that.
Others may confirm, but am I right in recalling the fine print that says you’d pay interest AS IF IT HAD BEEN ACCRUING THE WHOLE TIME?
So pay it off in time…or ELSE.
That’s my WAG based on my fuzzy memory of extremely fine print.
Here is my reasoning:
- You gotta have pretty good credit to qualify for one of those deals.
- If you have good enough credit, you’re sure as hell not about to blow it on a damned bed or something:)
- People who sell these things expect (or so I would think, anyway) that you’re not going to give it back after a month or whatever.
- Otherwise, what scout said.
If payment is not made in full by the end of the no payments/no interest period, interest is then due from the beginning. The great majority of people will not pay it off by then, and thus owe interest–and more interest than if they’d been making payments from the start. Naturally, one must have a good credit rating to qualify for these deals.
Highly disciplined folks who can pay the full amount in time get a great deal. They can collect a year’s worth of interest on the money while enjoying use of the product. But everyone else ends up paying pretty well.
I’ve got a sofa/loveseat on one of those “one year no interest same as cash” deals, and it’s definitely not a scam. As long as your credit is good and you pay it all off before the deadline, you’re golden – but if you miss the deadline, you get whammied with the accrued interest like nobody’s business.
I haven’t paid a penny on my charge yet, but I’ve still got eight months to go. I would have paid off most of it already, but the family income took a hit in the shorts around the start of the year…
I bought a leather sofa that way myself. Paid nothing for six months then paid the whole thing off. Never paid any interest.
In addition to the above, there is an odd accounting trick where showing on your books that people owe you money is almost as good as actually having money. If they get enough people to buy from them who normally wouldn’t then they may actually improve their position. (No, I don’t understand it either but that’s how it was explained to me. Of course, the person doing the explaining also works for Arthur Andersen and we know how reliable their advice has turned out to be…)
With few exceptions, there’s no real catch. As everyone has said, IF you fail to pay up by the agreed date then you tend to get stung for a hefty chunk of interest which may be calculated from the date of purchase, not from the date the debt became ‘overdue’.
In general, these offers are made in retailing sectors where (a) competition is fierce (b) the retail chains want to offer their best lures to impule buyers © they can’t fight much on price so they compete on ‘instant’ availabaility and credit terms (d) seasonal and fashion factors mean it’s more important to shift stock than it is to gather the cash now.
However, there are some nasties to watch out for. First of all, when you enter into one of these agreements, you generally get hit with a fair amount of paperwork. This may involve certain actions that have to be completed by a certain date (e.g. complete an insurance section of the form and post it off to head office within 28 days of the purchase). Failure to comply can invalidate the agreement.
Secondly, you tend to end up as just one of 1000s of customers loggoed on the company’s computer, and if they screw up any of the paperwork you can lose out with little way of proving it’s their error, not yours. This happend to me with some video hardware I bought. FOr the warranty to be valid, I had to complete a form and post it off to the retailer’s head office within x days. I did so, but I never got the warranty confirmation that was supposed to come back. Any attempt to rectofy this just got snared and lost in the dense maze of internal corporate non-communication. So far, the video kit has worked fine, but if it doesn’t… I could be up a gum tree.
The Fed prime rate is currently at 4.75%; that is the lowest it has been since 1960. Credit is so cheap now that companies can “eat” the cost of giving you a loan and it isn’t really eating into their profit that much, especially if they bump up the price a couple of percent, and especially if they can increase their volume significantly at the same time. I heard a commentary on NPR yesterday that mentioned some economists think that the recovery from the recession may be very shallow, because there is no pent up demand, owing to the fact that a lot of people took advantage of the 0% offers to make major purchases like automobiles.
Interest free credit often doesn’t work quite as you might hope with the repayments; you might buy an oven for, say, £750; you pay a fixed initial amount of maybe £100, then 11 monthly payments of only £20; when the deal ends, your last payment is due and it’s £430, but unless you have diligently saved up the money, you carry on paying smaller amounts, but now at hugely inflated interest.
None of the interest free credit deals that I have seen allow you to pay the entire amount off in a series of equal portions through the term.
That said, I can attest that the accounting for these kinds of transactions is, well perhaps scam is too strong a word, but you can use your imagination (which companies frequently do).
Maybe it’s different in the UK, but every time I have used one of these deals, you are free to make whatever early payment you wish. You mention 11 payments of 20 pounds then a large final payment- you probably could have divided the entire balance by 12 and made that payment monthly.
Personally, I hardly ever buy a big ticket item anymore without this sort of credit inducement- even if I can afford to pay cash. I don’t mind taking a little profit out of the seller’s hands and putting it in mine.
If it’s a big corporation, they can record the sale as a profit right away. In this quarter-to-quarter empasis on earnings in the stock market, that’s all some people care about.
If it’s not a big corporation, like a mom-and-pop operation where they actually want the money, not just the accounting, (or even a big joint that still likes cash flow) the business is actually shuffling you off to a credit lender. In the shitload-of-paperwork you have to fill out you’ll find the name of the credit lender.
So the business does get the cash money right away. The credit company is out the money, but they know most people aren’t dilligent enough to pay off the purchase before the interest kicks in. So they profit too.