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…