"No interest" financing deals sound great, but in fact they cost you more, not less. Let's look at an example.
I want to buy a lawn mower. The model I like costs $398. I don't have that much cash, and it would take me months to save up that much.
But the MegaStore has a tempting "Buy Now, Pay Later" offer:
Of course I know to check for the APR. It's 21 percent, which seems pretty high. I wish I had brought a calculator so I could figure out the interest rate. I'll have to work it out in my head:
Still, there's no payments or interest for three months. Sounds great! That should lower the price some, and I really want that mower. I decide to make the purchase.
I just fell into the first trap!
Buy yourself a calculator. You can get a solar-powered calculator (no batteries!) for less than $20. It's about the size of a credit card and will fit in your wallet. Unlike a credit card, the calculator will save you money!Not that good at math? With the help of a calculator, you'll have all the math you need to save you hundreds or thousands of dollars on your purchases. Besides, nothing scares a high-pressure salesman like the sight of a customer pulling out a calculator!
Back to our story. . .
I agreed to pay 21% APR to finance my lawn mower purchase. How much will that cost me?
First make sure you've added up the total cost, including taxes and fees.
$398.00 Lawn mower purchase price
+ 31.84 Don't forget the sales tax!
-------
$429.84 This is the total amount that will be financed
To figure out a percentage, first convert the APR to a decimal number. So "21%" APR becomes "0.21".
Now multiply the dollar amount by the APR:
$429.84 This is the total amount of the purchase
x 0.21 This is the percentage (21%)
-------
90.2664 Round this up to $90.27
This credit agreement will cost you $90.27 if you pay off in one year. Now add this to the original cost of the item:
$429.84 This is the total amount of the purchase
+ 90.27 plus the cost of financing for one tear
-------
$520.11 Here's the total amount you'll pay
That's more than I bargained for! Still, I remember that promise of "no payments or interest for three months." I think to myself that, once I deduct the first three months' interest, I'll be back to paying about $484. Right?
Wrong! Take a closer look at that credit agreement.
Let's look at the fine print in the MegaStore "Buy Now, Pay Later" offer:
Payments will not be required for three months on any approved lawn and garden outdoor power equipment single purchases of $150 or more charged to your MegaStore Charge Card account between January 2, 2000 and March 2, 2000.
Don't stop now, there's more:
Finance charges will accrue during the three month period, but will be credited to your account if the purchase and optional insurance premiums on the purchase are paid in full within three months.
This is confusing language, but what it means is that I will be charged interest for the first three months. But if I pay off the entire amount owed, including interest, then the store will pay me back . . . sort of. They won't actually pay me back in cash, but in store credit!
What about the "Buy Now, Pay Later" deal? All it means is that the store will let you postpone your first payment. However, the store will start billing you right away, and the cost of your lawn mower will go up because of finance charges. The longer you wait to start paying, the more money the store will make in finance charges.
The only way for me to come out ahead would be for me to pay off the entire amount of the purchase, plus interest, within 90 days. Remember, that's $520.11, not the $398 (plus tax) that I saw in the store ad. In return, I would get $90.27 credit on my MegaStore credit card.
Of course, I could have simply paid the entire purchase price up front, and kept that $90.27 in my own pocket.
These insurance agreements are written to benefit the insurer, not the customer. The only thing to remember about credit insurance is: Don't buy it.
