Friday, December 11, 2009

By 

James W. Stone

I'm sure you've seen ads that shout "No interest financing for 12 months!"  Maybe you gave it a second thought. Maybe you even took the bait. Let me give you some reasons why your "second thought" should be to run away from a deal like this.

Consider how one person I know took the bait. Marge is up in years, living on Social Security payments and the meager earnings from her bonds and dividend-paying investments. In today's economy, she can barely make ends meet and can't afford to cash out her investments just to pay bills. But she needed to replace a sofa that began to fall apart. Marge had hoped the sofa would outlast her, but it didn't. So, she went shopping for a sofa.

Marge is careful with her money. She knew she could pay cash for the sofa if she changed her budgeting a little bit and took some money out of the CD that was coming up for renewal. But she also knew she could find enough for a monthly payment if she financed the purchase. After all, the interest rates on her investments were so low, she thought maybe she could finance the sofa at a low rate, too.

When Marge went to the furniture store in October and saw the sign that said "No Interest Financing!" She asked what that meant. The salesman explained the financing would charge no interest for 18 months. It was like buying the furniture on layaway and not having to leave it at the store, but she would have to pay the state sales tax when the furniture was delivered. With that encouragement, Marge found a sofa she wanted with reclining seats, and stain protection on the fabric. She made the deal. Her first payment would be due around the end of December.

Marge figured out  that her new sofa costing $1,650 would have 18 payments of $91.67. She could handle those payments without too much difficulty, assuming she had no other "emergencies".

In early December, Marge got her first notice of the payment due. It came from a well known finance company that was handling the "promotion" for the store. But the amount due was $144.50! This was beyond what she could squeeze out of her monthly budget. She asked me how this happened and what she could do about it.

When I looked at the paperwork for the sales transaction, the store had written up the sale as though it was a cash transaction, except that there was a note under the sales total that read simply, "[FINANCED]." There was no statement of financing terms. There was no paperwork to indicate that Marge had applied for credit. The paperwork indicated her name, address and phone number correctly. I suppose that is all they needed to extend credit to her.

Her first notice of payment due did explain the terms of the "Promotion." The purchase was financed for 12 months at zero interest. And there was a $7.00 monthly service charge on the account. Marge's next action was to go back to the salesman to get an explanation. After some hesitation, the salesman said the promotion was at the end of its six-month run at the store. He was so used to saying 18 months, he just forgot to keep adjusting it lower as each month of the promotion passed. Actually, there were only 12 months available for her "promotion" by the time the sale was made. That pushes the monthly payment to $137.50. Then, there was the addition of the "service charge".

Marge was outraged. The salesman had misrepresented the terms of the sale to her and had not clarified it on the bill-of-sale documents. Marge had nothing in writing to indicate the salesman was lying to her to get her business. But she had taken her adult daughter shopping with her . She had a witness.

Marge has managed to end the deal to her satisfaction by paying off the balance of the amount financed. The salesman offered to personally reimburse her for the $7.00 service fee she was required to pay. He thought that was a generous offer.

"Remember," Marge told me, "If I had kept that loan and failed to make all my payments on time, they were going to charge me interest at 29%. I wanted out of that deal." I pointed out to her that the $7.00 service charge amounted to the same thing as 10.18% annual interest based on an average balance financed. The "No Interest Financing" would have cost Marge $84 in “service charges” for the year.

If you're tempted to accept "Free Financing" or "No Interest Financing" to get something you want NOW that you can’t afford to buy outright, remember Marge's plight. If you don't RUN the other direction, at least make sure you know all the terms before you accept them. More importantly, make sure the terms of the purchase and financing are in writing before you accept the deal. How much is financed? At what interest rate? For how many payments? With what service charges?

Signs that say "Free Financing" or "No Interest Financing" should be read as "Danger Ahead!"

James W. Stone
Copyright 2009, James W. Stone, all rights reserved worldwide

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