A bunch of local furniture stores are hawking their wares on TV-and advertsing that if you buy a livingroom set, you can have it and pay NO Interest, and NO Principle till 2008? How is this possible? They essentially give you a free loan for 11 months? What does the fine print on these contracts actually say? i suppose if you miss the full payment 9when due0, you probably get hit with 28% interest for the year!
I think it’s usually something like that; the 11 months is long enough for you to forget about saving up the cash to pay it off (leaving you stuck with expensive loan repayments
Also, I think there may be no reminder when the interest-free period ends, just commencement of the high-interest part of the loan.
At least that’s what it looked like when I nearly signed up for one once - there was also no way to play safe by paying off instalments during the interest-free period.
Around here, these things usually have a $99 “administration fee” which makes the whole thing rather unattractive for purchases under $3,000 or so, with a 3.75% cost of capital.
It’s also possible that the interest they would have earned on your money is built into the profit margin, plus in some cases, the loan may actually be in the form of some kind of store card, which they may hope will bring you back to buy from them again.
I think this is such a colossally dumb thing to do. Who wants to start paying for furniture that’s been sitting in your living room for a year? People have no sense of perspective. I’ve never heard that you couldn’t pay something off before the interest free date is up, though, so if you were going to put it on a credit card anyway it’s a good way to have an interest free loan (as long as there isn’t a fee for it).
It may not be common practice anymore, but some time ago, I nearly bought an item of furniture on ‘interest free credit’ and I we were had begun filling the forms when I innocently enquired what day of the month that payments would be due; the salesperson said there was nothing at all to pay until 11 months later - I explained that I wanted to pay monthly during the interest-free period, to save me having to be disciplined and saving the money elsewhere and she said it just wasn’t possible to do that.
As it turned out, payment of the full amount was due on or about some day 11 months hence, I would not get notification it was due. If I paid the full amount, it would be done and dusted - if I paid less than the full amount (or nothing at all), the balance would be converted to one of their monthly payment loans - invoking a conversion fee and charging a full month’s interest for any part month (i.e. the first day it went over the deadline).
I can’t explain why this came out like that, so don’t ask.
Given the choice between paying up front and paying later, of course paying later is always better, hence why they usually charge for that priviledge. That’s, like, the entire financial basis of our civilization. What does it matter how long the furniture has been sitting there?
What “perspective” are you talking about?
Generally there are two things to look our for in these deals.
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As Mangetout pointed out if you don’t pay the full amount off during the ‘free’ period you’ll be hit for payments and so forth.
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In a variant, some of these deals will allow interest to accumulate during the ‘free’ period…you just don’t have to pay it. So for a $1000 purchase at the end of the 12 month period you’ll be stuck with paying a note that is $1000+accumulated interest for the preceding twelve months.
I will say, though, that way back when Lady Chance and I used this sort of thing for some area rugs and furniture. We paid it down in about four months and the store had no issues whatsoever. They were very cheerful about it and it allowed us to furnish a room on the cheap.
Here is my experience. It is only one anecdote and others may have had better experiences.
I purchased a computer from Circuit City. The salesman talked me into using the 6 months same as cash. The first payment was due April 26. I had my credit union send a payment on April 12th from Harrisburg to Baltimore. The credit card company didn’t cash the check until April 28th and then charged me $35.00 late fee. This is more than I would have paid in interest if I had charged it without the “same as cash” deal for the same time period. Maybe the check got lost in the mail, I dunno. 14 days to travel 90 miles via US mail seems like a long time. The check was certainly sent on time (as shown by the date on the check put there by the credit union.) Neither the credit card company nor Circuit City responded to my courteous letter of complaint. (Not entirely true. Circuit City called to tell me that they could do nothing.) A search on Google showed that many others had run into similar issues during that period. Many claimed it was a new scam perpetrated by the credit card companies. The claim was that they were purposefully holding onto checks. I dunno about that either. Seems like that could possibly be considered fraud if it could be proven. Looking back, I would now refer the case to the Attorney General. If it was a scam, they would have the ability to look into it. In any case, I won’t buy from Circuit City again.
Is there a legal term for this fine-print trickery? Something like “undue influence”? These loans seem to have been tailor-made to exploit the ignorant-imagine finding out that instead of owing $3000, you now owe $4200 plus a loan conversion fee, and your interest rate will be 25%. This strikes me as borderline-illegal. :o
Back in early 2000 when I gutted the kitchen in my previous house, I purchased about $3500 worth of appliances from Sears, interest free for 12 months (or 18 or 24, who remembers?). I’d already had the money by virtue of a HELOC, so why not just take the free loan? There were no additional fees, plus I think I got free delivery of these huge appliances. About a week before the time was up, I went into the Sears store and wrote a check and paid at the register so there’d be no question that it was paid off on time. I’m getting prepared to do my current kitchen, so I’m going to look for the same deal someplace.
Sometimes the tricky consumer credit contracts are called “unconscionable” and can be rescinded.
Also a contract is supposed to be a meeting of the minds–another argument to use to get out.
It varies state to state, and often the state gov’t will specify what such a contract must contain, i.e. credit and warranty terms in large capital letters displayed in a conspicuous manner, etc. and then the credit co’s make their standard froms conform to the regulation.
I do these loans all the time. They come in two flavors: 1) pay a monthly payment each and every month until you’re paid up and you pay no interest. These aren’t very common anymore.
- You owe ($2K) and you can choose to pay every month or you can pay one lump sum at the end and you pay no interest. This is the one I’ve done the last three or four times I purchased under this kind of plan. We divide the bill by 11 (leaving one month free for unexpected trauma cushion) and pay that amount each month until we’re done. It’s the best of both worlds. You build a good credit rating and you don’t pay interest. I love them!!
That sucks. I always get a monthly statement when I do this. I pay a percentage each month and they recognize that payment on the next month’s bill.
I forgot to add that if I don’t pay anything, no big deal. It always says $0.00 due. I just paid one of these off last month, one month early. WooHOO!
You’re probably getting flagged as doing business with sub-prime lenders though. Having store cards can actually hurt you in some lending/credit scoring algorithms, versus having a real Visa drawn on a real credit account with a regular bank that does business with people with good credit.
Just a heads-up.
This is exactly what I do. I just bought my mom a plasma tv with one of these deals. I do love these deals. I’ll even go ahead and send payment with a credit card check (one where I carry less than 3% balance, they’re always sending me checks). I just applied for a loan for a house, and I’m averaging a 770 on my FICO.
What you’re referring to is the UCC. Most states UCC’s are all alike. And, these deals, are safe to assume, that a lawyer has looked these plans over to make sure that they conform.
Additionally, the exceptions to contract formation you have listed are very difficult to enforce in court. Unconscionable usually deals with public policy. A meeting of the minds is difficult to prove if all parties knew that a contract existed.
My wife and I just bought a bunch of furniture under one of these plans (no payments until 2008, no interest until 2010). I’ve bought a number of things under such plans, and I’ve always paid them off in full before the interest kicks in. Shouldn’t be too difficult here, either.
The reason why we’re doing it this way: our furniture is worn out and pathetic now, needs to be replaced now, and we don’t have the cash on hand now. Why not pay it out, if it ends up being the same total price anyway? We’ll get to enjoy the furniture immediately, instead of having to wait several months to scrape the funds together. Besides, this way we get furniture that’s under warranty before our little hooligans arrive (my wife is 6 months pregnant right now, and we’re adopting another one; I made sure to ask specifically if the fabric was covered against Spaghetti-Os stains) to have during their messiest years. Bonus!
The salesman told us that their minimum payments are set so that the loan amount is paid off in full at the end of the promo period, before the interest kicks in. I’ve never seen one structured like that, and I don’t know if it’s true or not, but we plan to get it all paid off anyway.