02 Aug Interest Free Usually Costs Money!
Crowley Furniture and Nebraska Furniture Mart in the Kansas City area are two of the largest furniture retailers. Both of these retailers lure people in the store by saying; Hey come buy your furniture here and you can have 60, 90 days or heck let’s just give you 2 years interest free financing.
This means you don’t have to make a payment during that time and it is interest free. We can purchase all the furniture we want, budget ourselves and pay it off within the specified period and it did not cost us a dime in interest. What a great deal!
Then reality sets in the cost of living sky rockets. So instead of making your payments on time and paying off that purchase within the specified grace period the money goes into the gas tank or food goes on the table. So at the end of the yellow brick interest free credit road you have not paid off that original agreement and now the balance is quite a bit higher than what it was before. This does not make sense as it was supposed to be interest free.
Make no mistake retailers regardless of their name are out to make money. If they don’t make money then the business fails. This does not mean that I think the retailers are evil and should be stopped from running interest free programs. But I do think that you need to be informed about “interest free financing.” The companies who finance these purchases are relying on human nature. They develop programs after studying the psychology of human beings and what buttons can they push to entice you to purchase something, anything at all. See if they can get you through the door to purchase anything they view it as a good day.
So the psychology behind “interest free financing” is that I, the store owner, know that you want to purchase nice furniture. After all you work and you deserve a $3,000 – $5,000 couch. Why, because if you can’t you are a failure just like media and the credit card industry would lead you to believe. Enter the financing company, they know based on psychology of Americans that probably over 75% of you are NOT going to payoff that interest free purchase because you could not afford the purchase to begin with and/or life gets in the way. You are not a loser because the media says so and you do not need a $3,000 – $5,000 couch to be successful.
The end result is that on the last day of that interest free grace period if the original agreement is NOT paid off then interest at whatever percentage rate has now sprung to life and attached itself to the amount due and owing. The average interest that I have seen is 9%-12%. The interest will accumulate according to the purchase agreement and terms of that agreement.
So a line of credit for $5000 for 2 years interest free could cost an additional $400-$500 more or even higher depending on the terms and conditions of the contract if the entire balance is NOT paid off within that grace period. This balance increases regardless of the payments you made or even if you just have $1.00 left to pay.
If you are going to use the interest free financing then get the facts first. READ THE CONTRACT. Yes, Virginia you are signing a legal contract when you purchase anything with financing. This means that you can be sued if you do not pay. Understand the terms and if you are not comfortable with the terms or do not understand them then just walk away.
As time goes by I become a bigger and bigger fan of Dave Ramsey’s cash only system. People will make deals. How do I know? Because I just used this philosophy on Basset Furniture the other day. I walked in with cash in hand. The dealer tried to sell me a couch that was higher than what my budget allowed. I informed him that I wanted this particular couch at this particular price including tax. Not a penny more. He said; NO! I replied with good bye (Cue AOL) and headed for the door.
The end result was I got my couch for the price I set which was $2500 lower than what he started at and I paid cash for it. Why Bassett as opposed to Nebraska Furniture Mart or Crowley? Bassett had a better deal. Personally, I love Nebraska Furniture Mart and Crowley’s furniture. It is the cost of credit that I no longer enjoy so I deal in cash and if you as the retailer do no want to work me as the consumer I will be more than happy to take my cold hard cash somewhere else.
Remember knowledge is power and the FTC has a wonderful website where you can gain all sorts of powerful facts to assist you in making a financial decision.
Bottom line: generally interest free winds up costing you money in the long run. Be informed, be prepared and be ready to walk away if you are not 100% satisfied with the terms and conditions presented.