Lessons Learned: Interest Free Financing

Every Friday I post about one of the lessons I’ve learned so far in life, both financial and about life in general. We’ve all learned valuable lessons along life’s journey, sometimes the easy way and sometimes the hard way. Hopefully someone will read what I learned and avoid having to learn the same thing the hard way. Check back every Friday for a new lesson learned.

Interest Free Financing

In most weekly flyers, you come across deals offering a year or two of interest free financing on your purchase.  You commonly see these kinds of offers for large electronic items (TV’s, surround sound systems, etc) and furniture sets.

The no-interest financing works much like any other credit card. You open a credit account and apply your purchase to the account.  You get a monthly statement in the mail letting you know the minimum payment and showing the amount of interest charged during the month.  The trap that you can fall into is this:  If you only make the minimum payments, it is impossible to pay off the entire balance by the time the zero interest period expires.  Even if you make larger payments, you run into the same trap even if you have a remaining balance of $20 by the time the zero interest period expires.

When that zero interest period expires and you still have a balance from your initial purchase, you’re in for a world of hurt.  Let’s say you bought a $3,000 furniture set with zero interest for two years (it’s 21.9% after that, but you’ll pay it off before then, right?).  The minimum payment would start out at around $60 a month.  Now if you paid that same $60 a month for two years, at the end of the zero interest period, you would still owe $1,560 on your account.  Since you didn’t pay it off, the credit company goes back to the initial purchase date and starts charging you interest.  Get ready for this: after month 24 when they add back the interest for each of those months, they’re going to add a little more than $1,000 to your balance.  This represents the interest that they would have been charging you in each of those 24 months.  So, even if you pay the remaining balance in month 25, your $3,000 furniture set now cost you $4,000.

The Bottom Line

Luckily, this is a lesson that I learned the easy way by watching someone else go through this.  I’ve used interest-free financing myself, but I’ve always made sure to pay off the entire balance at least a couple months before the zero interest period expires. An even better idea is to make sure you have the money before the purchase.  Just park the money in a savings account and use it each month to make the payments, and make sure to pay the balance in full before the zero interest period ends.  That way you’re earning interest on the savings account and not paying any interest on the purchase.

Have any of you had an experience (either positive or negative) with a zero-interest offer? Share your story in the comments section below…

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Lessons Learned: College Financial Aid

Every Friday I post about one of the lessons I’ve learned so far in life, both financial and about life in general. We’ve all learned valuable lessons along life’s journey, sometimes the easy way and sometimes the hard way. Hopefully someone will read what I learned and avoid having to learn the same thing the hard way. Check back every Friday for a new lesson learned.

College Financial Aid
When I was a senior in high school, my parents and I received a letter in the mail from a company hosting a financial aid seminar. It said they would discuss how college financial aid works and strategies for getting the most aid. The seminar was free, so we decided to attend.

The presenters at this seminar concentrated mostly on explaining how the FAFSA (Free Application for Federal Student Aid) worked and how most financial aid is based on information contained in this form. They really emphasized the importance of filling out your FAFSA correctly and recited several horror stories of students that filled out their forms wrong and missed out on financial aid.

They concluded this seminar with a sales pitch. Basically, for $500 (I think that was the price, but I don’t remember for sure), they would fill out your FAFSA and make sure all the forms were correct. In addition, they would send you a bunch of information about the colleges you were interested in attending. We didn’t want to risk filling out the forms wrong and missing out on financial aid. We were a pretty poor family, and financial aid was the only way I was going to be able to attend college. So, we paid the money and signed up to have them fill out my FAFSA. Later on when we actually looked at the FAFSA, we realized that this company was basically running a scam, albeit a perfectly legal one.

Now, anyone that’s ever filled out a FAFSA knows that it really isn’t that difficult to fill out. Almost all the dollar figures on this form come straight from your completed tax return. But at the time of that seminar, we didn’t know any of this. I was the first of my family (including extended family) to go to college, and we were all pretty clueless about the whole financial aid/paying for college thing. For my next three years, I filled out my own FAFSA online. It was easy and didn’t take very long at all.

There are many companies out there doing the same thing: preying upon those that don’t know enough about financing college. Technically, this company did nothing illegal. They filled out my FAFSA that year for $500. It was just a rip-off. I know now that there are many resources available to assist families that need help filling out financial aid forms.

Along the same lines, I know there are other companies out there that charge a fee to help locate college scholarships. The thing is, you can go online and search for college scholarships for free. You can go to your guidance counselor’s office in high school and find many available scholarships as well.

The Bottom Line
Before agreeing to attend any type of seminar or pay for any service, do some research first. If we had done this, we would have known not to waste our money. And know that any company that offers to find scholarships or fill out financial aid forms for a fee is just out to take advantage of you.

Lessons Learned: My First Vehicle Purchase

Every Friday I post about one of the lessons I’ve learned so far in life, both financial and about life in general. We’ve all learned valuable lessons along life’s journey, sometimes the easy way and sometimes the hard way. Hopefully someone will read what I learned and avoid having to learn the same thing the hard way. Check back every Friday for a new lesson learned.

My First Car Purchase
I wasn’t really involved too much in the purchase of my first car. This was back in 2002 during my senior year of high school. My dad and I had been looking for used cars, test drove a few, etc. One day after school I went to a car lot and was checking out the cars and saw one that fit the bill. It was a nice little car (a 1994 Geo Prizm), and the price was in the budget my parents set. The actual purchase was handled by my dad, which included coming to a deal with the sales person and all the back office “stuff”.

Two years later I was rear-ended, and my car was totaled. The insurance company gave me a roughly $2,000 check, and suddenly I needed another vehicle. So, I looked online at various car lots and visited a few of those lots. I found a pretty sharp looking 1997 Dodge Avenger. It was a real sporty car, a red, two-door coupe with a sticker price of $7,500. I came back again with my dad to complete the purchase and set up the financing. This was going to be my first real loan, so I needed my dad to co-sign on the loan. I was working part-time and would handle the payments. The thing I remember most is that we didn’t really negotiate with the car salesman. I remember my dad asked the guy how low he could go on it, and the guy said, “I can go down to $7,000 if you buy it tonight.” So, that’s what we did.

When I look back on this, it almost makes me laugh. I ask myself, “What were we thinking?” But the truth is that I had no clue how to go about buying a car, and that is a huge problem that people face. Since that car purchase, I’ve learned a lot about how to buy a car. My next two vehicle purchases were much better, and I felt much more in control of the whole situation. The reason for this is simple: I’ve read up on how to go about buying a car.

Tips for Buying a Used Car
View Listings Online: Get online and browse what cars are out there, both at car lots and from individuals. This gives you the advantage of being able to go to a car lot and know the exact cars they have and a lot of times what the sticker price is.

Research Vehicle Values: While you’re on the internet browsing through used car inventories, check the estimated value of the vehicle. Three good sources are Kelly Blue Book (www.kbb.com), Edmunds (www.edmunds.com), and NADA (www.nada.com). You’d be amazed at how high the sticker price is on most cars compared to the true value.

Arrange Financing First: Before you go to a car lot to purchase a car, call your bank or credit union, and see what kind of financing is available to you. This gives you an idea of what your interest rate and loan payment will be. Additionally, you can use this as a bargaining chip. Most car dealers get a kickback when they arrange financing through the dealer. If you already have financing arranged, a lot of times the dealer will work to get you a lower rate if you finance through them. For example, we bought a vehicle a few months ago, and I knew the rate I could get at my bank. I told the dealer this, and they offered a slightly lower rate. I played the loyalty card and said the rate they offered wasn’t low enough to get me to use a financial institution other than my regular bank. The dealer then offered me an even lower rate, which I took.

Be Willing to Walk: Don’t be afraid to walk off the car lot without buying the car. If the dealer won’t come down to the price you’re targeting, simply tell them that you’re not interested in the car at the price they’re asking. Give them your phone number and tell them to give you a call if they change their mind. If you’ve looked online and researched what the value of the car should be, more than likely the dealer will call you back within a few days and come down to your price.

Act Like You’re in Charge: Whatever you do, do not just walk into a car lot and say, “What kind of cars do you have for $x,xxx?” This lets the dealer know exactly how much you’re going to spend, and they can steer you toward cars that have a sticker price around that amount. Despite what they may say, the car salesperson is not on your side. Hold your cards close to your chest.

Additional Tips
What are some of your strategies for buying a used car?

Lessons Learned: My First Job

Every Friday I post about one of the lessons I’ve learned so far in life, both financial and about life in general. We’ve all learned valuable lessons along life’s journey, sometimes the easy way and sometimes the hard way. Hopefully someone will read what I learned and avoid having to learn the same thing the hard way. Check back every Friday for a new lesson learned.

My First Job
I’ve mentioned before that during high school and through most of college I worked a part-time job at our local Wal-Mart. I started right after I turned 16 years old and met the age criteria for most retail stores. A good number of my fellow high school students worked there as well, and I was always amazed at how quickly they came and went. They would work for a couple weeks or months, then get tired of working and quit. They saw it as a pretty lame job with nothing to learn from. A lot of them messed around a lot at work, didn’t take anything seriously, and eventually got fired. Maybe that’s just how “average” high school kids are, though certainly not all of us were like that.

I never really understood that. I’ve always believed that you can learn something from just about anything, and I applied that belief to my part-time job. I think working retail is one of the best things a young person can do. You learn how to deal with customers, how the supply chain works, how to deal with other employees, how to prioritize your job duties, and a wide range of other things that you can apply in your future. The thing is you have to actively seek out a lot of that knowledge. My managers were always eager to talk about how and why things worked, and they were always pretty surprised when I’d ask them about these things. I guess a lot of people just never think about the inner workings of their job or company. You’d be surprised at all the intricacies involved at a retail store, from the best methods of stocking shelves to the most efficient way of unloading a truck and getting merchandise out on the floor.

I worked at Wal-Mart for five years, until I landed an accounting internship during college. I always knew that my job at Wal-Mart was temporary, and so did my managers. But every now and then they would try and talk me into going into management. If I didn’t already have other career ambitions, I would have seriously thought about that.

No Such Thing as a Dead End Job
The point is that I don’t believe in the concept of a “dead end job”. If you take your work seriously and learn as much as you can from it, other opportunities will open up for you. It might be a promotion at the same company, or maybe the added skills and knowledge will assist you in landing another job elsewhere. Like most things, you can only get out of something as much as you put into it. If you go into a job with the assumption you won’t learn anything or get anything out of it, you probably won’t.

Lessons Learned: My First Cell Phone Contract

I’m starting a new post series about the lessons I’ve learned so far in life, both financial and about life in general. We’ve all learned valuable lessons along life’s journey, sometimes the easy way and sometimes the hard way. Hopefully someone will read what I learned and avoid having to learn the same thing the hard way. Check back every Friday for a new lesson learned.

My First Cell Phone Contract
I was in high school at the turn of the millennium, when cell phones were starting to become widespread. By the end of my senior year I really wanted one of my own, and not just a pre-paid one. I would be going to college in the fall, and I wanted a “real” cell phone.

So I signed up for a 2-year cell phone contract and felt like a real adult. The plan was something like $30 a month, which I could afford. I had been working at Wal-Mart since turning 16 and could swing the payment. What I didn’t know at the time was that there are fees on top of fees on top of taxes on top of a bunch of other random charges. My $30 a month cell phone plan was more like $45.

Reality Hits
It didn’t take long to realize that I just didn’t use enough minutes on my monthly plan to make it worthwhile. And the monthly payment meant I had to work more hours during that first year of college. I put in close to 30 hours a week working at Wal-Mart in the evenings after classes. My cell phone wasn’t the sole driver of that, but it played a part.

My grades didn’t suffer or anything, but while my friends were hanging out back at the dorm, I was off to work. Sure, I thought I looked pretty cool talking on my phone as I walked around campus (which admittedly wasn’t very often), but not cool enough to justify what I was paying.

Compounding The Mistake
It was less than a year into my contract when I finally decided I was done with the cell phone contract. It just wasn’t worth it. So I called the company to cancel, only to be told that there was something like a $150 early termination fee! Ouch, maybe I should just ride it out. At least I knew enough to do the math on it though. I knew that my $45 a month payment for another year would approach $500 total. Paying the early termination fee would sting (and force me to put in some more hours at work) but it was the better option. So I went ahead and cancelled the cell phone plan. I bought a little pre-paid phone soon after and thought it was just fine.

Lesson Learned
Before signing up for something, make sure it’s something you truly need. And make sure you understand exactly what it’s going to cost.