The Truth About No Interest, No Payment Retail Financing Offers
By Remar Sutton, DCU StreetWise Spokesperson
"No interest until …next year!"
"No payments …until 2006!"
"180 days or 6 months same as cash"
Furniture, appliance and electronics retailers, in particular, love to throw out these teasers, hoping to entice you into buying something big. Or just to get you into the store where you may at least buy something. But before you jump off the couch and head to the store, you need to ask, "What's the catch?" Because there's always a catch. Behind the headlines are the asterisks and the small print with the real deal. Here are the most common "catches" with these offers:
- You must apply for a credit card or line of credit. Most "no payment" and/or "no interest" offers are tied to a store credit card or a "branded" credit card (a Visa card or MasterCard with the store's name on it). Some are tied to a line of credit. All have lots of stipulations about what you must do and what happens if you don't do it. For instance, if you're late with a payment or don't "keep your account in good order" then the interest kicks in earlier than the promised period. And the interest is usually very high—an APR of 19 to 25% on average.
- Only buyers with "approved credit" qualify for the offer. And if you don't qualify in the seller's judgement as great rate bait, why they have another plan that is just right for you. Usually, you'll find that the plan you "qualify" for doesn't have a grace period and does have very high interest rates.
- Only large purchases qualify you for the offer. Often you must make really large purchases of $1,000, $2,000 or more. Will you be disciplined enough to pay such a large loan off within the promotional period, particularly if you don't get a monthly statement? Can you afford to pay the large amount off within the promotional period? At the end of the "no payment" period, if you still owe money on the loan, you encounter two more catches—accrued interest and really high interest rates. Even if you have to spend only $200 - $300 to qualify, there's still that accruing interest at those really high rates.
- Interest accrues. With the vast majority of offers such as "no payment for 12 months" or "90 days same as cash," interest keeps accruing. During your "no pay" period, the meter is running, usually at a high interest rate. If you don't pay off the total loan amount by the end of the "no required payment" period, then you have to pay all the interest that has accrued on the total amount of the loan from day one.
- High interest rates. Although a few companies may offer some promotional interest rates that are competitive with bank financing or even credit union financing, the vast majority of "no payment …no interest" promotions come with very high interest rates. Even if interest truly does not accrue during the promotional period, the interest rate you'll pay on any amount you still owe at the end of the "no payment" period will be high. And miss a payment, fail to pay the minimum required, or commit some other error found only in the fine print and most will raise the interest rate even higher and, if you were on the "no accrual" plan, throw in accrued interest from the purchase date as well.
- Subtle snares. In addition to the major problems above, watch for these little traps.
- Buy something other than the goods you bought when you got the promotional deal and the store credit card will allocate your payments on the account in some "proportional" manner. This may mean that you are not actually paying down that big purchase loan as quickly as you thought.
- Buy something other than the original purchase with your "branded" credit card and you may trigger an annual fee as well as proportional distribution of payments.
Remar's Recommendation
If you need to make a large purchase for furniture, appliances or that home theatre you can't live without, do your homework. Determine what you can realistically pay over a realistic period to purchase the items. Then, check with your credit union or bank to see what loans they offer. In the vast majority of cases, you will be better off to arrange a low-interest installment loan with DCU than to bite on one of the promotional deals. Talk to your loan officer. Put smaller purchases, say under $400, on a low interest credit card you already carry or save up for a few months until you can write a check.
Prepared by Remar Sutton and Associates for DCU, July 2003. All rights reserved.
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