Many people who want to buy large ticket items, but do not have the money to pay in cash, opt for interest free financing. With this type of financing, the customer gets to take home that plasma screen TV without having to pay any interest along with their easy-to-manage monthly payments. Sound like a dream come true? It is. Almost. As long as you pay attention to the fine print.
What exactly is interest free financing?
Simply put, it is a plan wherein you get to purchase something by paying equal monthly payments over a certain number of months without incurring any interest as long as you pay off the total amount by a certain date. Many companies – Amazon, Best Buy, furniture stores, etc. – offer interest free financing. It makes a lot of sense for people who need (or want) something that they can’t actually pay for in full at the time of purchase.
So what are the downfalls to interest free financing?
Many consumers don’t read carefully when signing a contract. Think of how many times your eyes have glazed over while checking out the fine print on anything! But it is imperative that you know the terms of the agreement you are about to enter into. Make sure you know the answers to the following questions:
- What will your monthly payments be?
- What is your personal plan to make those payments?
- How long do you have to pay off the total amount before the interest rate kicks in?
- What is the interest rate that you are agreeing to pay after that date?
- If you do not pay the total amount off by that certain date, will you be charged interest on only the amount you still owe? Or will you be hit with interest on the total amount borrowed over the total time period? (i.e. Will you be charged interest on the $150 you still have yet to pay or will you be charged two years of interest on the full amount of $2,000? This is a huge variable and one that many consumers miss.)
Many consumer advocates encourage people to borrow only as much money as they actually could pay in cash. This may seem baffling – Why would you use interest free financing if you had the money to pay for your purchase in full? The idea behind this advice is that you could invest that money over the payback period. Advisers would also argue that it is a good idea to have that money in case something happens such as illness or job loss. In this way, you would still be able to pay off the full amount before the deadline.
For most of us, however, the appeal of interest free financing is that we can get what we want or need without currently having the cash to pay for it outright. And this is fine, as long as you take a few minutes to read the fine print.
Let the buyer beware.