Hello again!!
Businesses use many tools to get your attention and get your money. There is nothing wrong with this. This is how they grow and prosper. Although the marketing strategies and promotions are common, and arguably necessary for the survival of their business, the advertisers may not reveal just how the strategies will affect your path to wealth. It is important for you to keep your path clear as you use YOUR tools to build YOUR wealth. This is the first of three posts that address a few of the most common marketing tools used by businesses to influence you to hand over YOUR money to build THEIR wealth.
Interest “Free” (aka 0% interest and “same-as-cash”) Loans
First, there are two main kinds of “interest free” loans. One is 0% interest for the entire term of the loan. This is very common among car dealers, but I have also seen it for more expensive consumer items like electronics, such as, televisions, computer systems, and equipment purchases for businesses. This is exactly what it means. The seller/lender offers 0% financing on purchases for the entire length of the loan whether the payment terms are for a few months or for several years. Your minimum payment is equal to the total purchase price minus any down payment, then divided by the number of months. So, if you purchase a new TV for $1,800 and pay nothing down and finance it for two years, your minimum payment would be $75 per month for 24 months.
The second kind of “interest free” loan is referred to as “deferred interest” or “same-as-cash”. These loans offer the 0% interest rate for a limited time, but they begin to accrue interest at the time of purchase. The interest is not charged to your account as long as you are in good standing and the full balance is paid off within the specified time. These loans also often do not have a defined ending. The loan is ongoing as long as there is a balance owed. For example, you purchase an item for a total price of $2,100. The deal is 0% or “same-as-cash” for 12 months. In order to pay off the loan within the promotional period, you will need to pay $175 per month. However, if the full $2,100 is not paid within the 12 months, any interest that has accrued will be added to the balance and the loan will become open-ended until the balance is paid. Under this scenario, let’s say your required minimum payment is $60 per month, but if you only pay $60 per month for the first 12 months you will have paid off $720 of the $2,100 balance. On the 13th month of your loan, not only will you still owe $1,380, but any interest that accumulated for the first 12 months will also be added to your balance as well.
These promotions may be enticing. Promises of “free” money and low payments are exactly what the seller and/or lender wants you to see and hear. But, they don’t reveal the traps and obstacles that these “deals” cause to your path to wealth.
First, the largest obstacle to wealth for a vast majority of people is consumer debt. If you’re looking to purchase a new item and don’t have the money to pay for it, save up and then buy it. If you sign up for one of these loans, you may have the item in your possession, but you also have the obligation for the payments. If you save up and purchase the item outright, you will still own the item, but you won’t have the obligation of payments weighing on you afterwards.
Next, 0% sounds great, but it’s not all that it’s made out to be. One note, almost all of these special promotions are based on what’s known as OAC, which stands for “on approved credit”. You may also see WAC, “with approved credit”. This means the seller will run your credit before finalizing the transaction. If your credit score is on the low end of the spectrum, you will be ineligible for the credit terms. Most of these offers are only valid for those with higher credit scores. Remember, if you have decided to purchase an item and you pay with cash or debit, your credit score is irrelevant to the seller.
These deals promote impulse buying for those who qualify for the credit terms. So you just signed on to the loan and are ready to take your new item home. Did you add any accessories? Maybe you should add an extended warranty? If you purchased a piece of furniture, is a new cover necessary? How about a special polish and cleaner that won’t scratch the item? Are you taking the item with you, or is delivery necessary? If so, is delivery included because you are financing the item in lieu of cash/debit? Did you want matching pillows and sheets for your new bed? How about matching pillows or rugs for your new couch? That new entertainment stand or wall mount is perfect for the new TV, right? And, why not add the accessories and other items since the terms of the agreement is 0% or same as cash for “x” amount of months? It’s “free” money, right? This is how the debt begins to snowball in the wrong direction and definitely not to YOUR advantage.
Stay focused on YOUR path and YOUR wealth. Of course, purchasing items for your household is a good thing. Paying for them is the goal, not financing them. Consumer debt in no way grows your net worth. It always advances the wealth of the seller.
Thank you for reading!
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