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The "no interest" trap

BUY NOW, PAY LATER! 90 DAYS SAME AS CASH! NO PAYMENTS TILL NEXT YEAR!

"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:

Buy Now, Pay Later!

Ask about no payment or interest for 3 months on any purchase
when you use your MegaStore Charge Card.

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!

Trap No. 1: I didn't do the math

Don't let the salespeople do all the math for you. They are trained to figure out how to make the deal work for the store, not for you.
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.

Trap No. 2: I fell for "rebated" interest

"No-interest" financing almost always works this way: The store collects interest payments from you, but promises to give back the first three months' worth of interest -- after you pay off the entire amount. Usually there are more conditions in the fine print.

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.

Trap No. 3: Optional insurance

Oh, did you notice the line about "optional insurance premiums"? While I was signing up to buy my lawn mower, the salesperson offered me "credit insurance." For a low, low monthly payment, I could have insurance that would cover my payments in case I were unemployed, disabled or killed.

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.

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