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My wife and I are considering buying a home theater - plasma TV & new stereo - on Black Friday this year.

We do have the cash for it, but Best Buy is offering 0% financing for up to 3 years on its store credit card. We both have excellent credit and 0% financing is almost like free money since money today is worth more than money tomorrow (and we can continue to earn interest in our savings account on the money we'd otherwise use for the purchase).

We have no consumer credit card debt and like it that way, so I'm not too attached to the idea of a monthly payment, but 0% financing offers are almost too good to pass up (plus, we could always pay off the balance whenever we want).

Thoughts? Cash purchase or 0% financing?

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15 Answers 15

Be very careful with this. When we tried this with furniture, they charged an "administrative" fee to setup the account. I believe it was about $75. So if you defer interest for one year on a $1000 purchase and pay a $75 administrative fee, it's 7.5% interest.

Also, they don't always send you a bill when it's due, they just let you go over the date when you could have paid it without paying interest, and then you owe interest from the date of purchase. These plans are slimy. Be careful.

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Good input! If we go down this path, we'll definitely be on the lookout for any sketchy fees - and be sure to make payments on time. –  gabeanderson Nov 18 '09 at 22:11
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+1 for the warning. My wife and I had a furniture company that tried to screw us on this also. We had a long fight with them, but I won it at the expense of lots of wasted time. –  Jagd Aug 5 '10 at 18:07
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If you have online bill pay through your bank, schedule a full payment right away for a month or so before the due date. This will avoid the interest fee. (Just make sure there's always enough in that account so the payment goes through!) –  bstpierre Aug 5 '10 at 22:42
    
@bstpierre: I've even seen that strategy fail. The finance company considers your early payment as an "extra" payment in the previous month and you skipped a payment, therefore requiring you pay all interest from the time of purchase. –  Alex B Aug 12 '10 at 1:27
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How could they claim the APR was 0%, at least in the UK the law says all charges must be included int he APR –  Ian Mar 31 '11 at 11:35

I think so. I am doing this with our furniture. It doesn't cost me any more money to pay right now than it will to pay over the course of 3 years, and I can earn interest on the money I didn't spend.

But know this: they aren't offering 0%, they are deferring interest for 3 years. If you pay it off before then great, if you don't you will owe all the accumulated interest.

The key with these is that you always pay it, and on time. Miss a payment and you get hosed. If you don't pay on time you will owe the interest that is being deferred. They will also be financing this through a third party (like a major bank) and that company is now "doing business with you" which means in the US they can call you and solicit new services.

I am willing to deal with those trade offs though, plus, as you say, you can always pay it off.

WHY THEY DO IT (what is in it for them...) A friend of mine works for a major bank that often finances these deals here is how they work.

  1. You apply for a loan and get approved. The store does it's financing through another company (in my example a major US bank's "financial division")
  2. The merchant gets their money right away from the bank, you get your product and an interest free loan, the bank gets a "relationship" with you (a person that borrows money). The merchant is happy because they got paid for a product.
  3. Should you pay it off? Great, the bank got their money and can solicit you for future loans. They have a copy of your credit report, and can have a salesman call and offer you a debt consolidation plan tailored to your needs if they want. This isn't necessarily a bad deal for you or them.
  4. If you get near the end of your term without having paid it off, they definitely call you and offer a debt consolidation loan. Again, this isn't necessarily a bad thing.

Basically, banks do this to generate leads for their divisions that do cold calls. If you are a high credit, high income customer you go to a classic bank and request cash, if you are building credit or have bad credit, you go to a "financial services" branch. If you tend to finance things like cars and furniture, you get more cold calls.

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Thanks for the input! And right, key is to pay it off w/in 3 years. –  gabeanderson Nov 18 '09 at 22:10
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+1. Agree, but also consider the "administrative" fee pointed out by Scott W. I haven't yet seen a "0% interest" deal at an electronics retailer where such a fee wasn't present. –  Chris W. Rea Nov 19 '09 at 12:38

Debt creates risk. The more debt you take on, the higher your risk. What happens if you lose your job, miss a payment, or forget to write the final payment check for the exact amount needed, and are left with a balance of $1 (meaning the back-dated interest would be applied)? There is too much risk for little reward? If you paid monthly at 0% and put your money in your savings account like you mentioned, how much interest would you really accrue? Probably not much, since savings account rates suck right now.

If you can pay cash for it now, do it. So pay cash now and own it outright. Why prolong it? Is there something looming in the future that you think will require your money? If so, I would put off the purchase.

No one can predict the future. Why not pay cash for it now, and pay yourself what would have been the monthly payment? In three years, you have your money back. And there is no risk at all.

Also, when making large purchases with cash, you can sometimes get better discounts if you ask.

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I've tried a couple of times to get a better price by offering cash rather than taking the finance. It usually doesn't work, because the furniture company has already sold the debt to the finance company in bulk, and doesn't care whether you take advantage of it or not. The fact that the finance companies will take this debt on like that is an indication of how much they expect to be able to screw out of you by excess fees, late payment charges etc. –  DJClayworth Mar 10 '11 at 21:43
    
Debt is only a risk if you don't put all the money to pay it of into a interest paying accout –  Ian Mar 31 '11 at 11:36

You should look at the opportunity cost for your money (i.e. what kind of return it could generate otherwise). We took advantage of these types of offer (zero interest for x months) in the past with the goal to redirect the money to the mortgage (it was 7.5% back then) and we made sure we don't get hosed by the surprisingly high interest rate by having a big reminder in the bulletin board in the kitchen to make sure we pay off the money before the interest rate kicks in. So we basically reduced our interest on the mortgage during that period. Oh - we use an all-in-one account (Manulife One) so that was real nice.

I would stay away from those "interest-deferred" offers - it's totally not worth it.

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I think most people have already answered this one pretty well. (It's usually worth it, as long as you pay it off before the interest kicks in, and you don't get hit with any fees.)

I just wanted to add one thing that no one else has pointed out: Applying for the loan usually counts as a hard pull on your credit history. It also changes your Debt-to-income ratio (DTI). This can negatively impact your credit score.

Usually, the credit score impact for these (relatively) small loans isn't that much. And your score will rebound over time. However, if it makes your score drop below a certain threshold, (e.g. FICO dips below 700), it could trip you up if you are also applying for other sources of credit in the immediate future.

Not a big deal, but it is something to keep in mind.

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You know what?

Pay cash, but ask for a discount. And something fairly hefty. Don't be afraid to bargain.

The discount will be worth more than the interest you'd get on the same amount of money. And if the salesman doesn't give you a decent discount, ask to speak to the manager. And if that doesn't work, try another store.

Good luck with it!

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This generally won't work at any major national retail chain. They just don't benefit from the savings of dealing with cash enough - especially at the local store level - to haggle on those terms. –  LessPop_MoreFizz Sep 16 '11 at 1:27
    
It's not so much the fact that the payment is in cash, but the sales targets/commission that the store need to meet. But you're right. Large chains are definitely less likely to haggle.That said, it's still possible. –  davewasthere Sep 16 '11 at 14:54

I have abused 0% interest programs time and time again, but only because my wife and I are assiduous about paying our bills on time. We've mostly taken advantage of it with bigger purchases that we've done through Lowe's or Home Depot (eg - washing machines, carpeting, stove, fridge), but its been well worth it.

There are two rules that we set for ourselves whenever we do a 0% interest program --

1) We have the money already in savings so that we can easily pay it off at any time

2) We agree to pay our monthly bill on time

There's nothing quite like using another person's money to buy your things, while keeping your money to gain interest in a savings account.

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Pay cash. You have the cash to pay for it now, but God forbid something happen to you or your wife that requires you to dip into that cash in the future. In such an event, you could end up paying a lot more for your home theater than you planned.

The best way to keep your consumer credit card debt at zero (and protect your already-excellent credit) is to not add to the number of credit cards you already have.

At least in the U.S., interest rates on saving accounts of any sort are so low, I don't think it's worthwhile to include as a deciding factor in whether not you "borrow" at 0% instead of buying in cash.

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I won't repeat what's already been said, but I agree that it's a good move to take advantage of the free financing so long as you read the fine print carefully, keep the money designated to pay off this debt and not use it for anything else, and make sure to pay it off before you get smacked with some bad interest.

One thing that hasn't been mentioned is that this kind of offer can help build credit. You mentioned that you already have excellent credit, but for someone who has good credit, this could be an account that, if used carefully, could give their credit a boost by adding to their history of on-time payments.

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If you do it, be sure to read what you sign. They'll sign you up on some type of "credit insurance" and not tell you about it. It costs like $10 a month. If you don't sign up for that, you should be fine. I bought my HDTV this way, though I wish I would have saved and paid up front. I'm moving more towards the "cash only" mindset.

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I bought a Thinkpad in Dec 2007 using BillMeLater, which was working with IBM/Lenovo at that time. I was getting the notebook at the lowest price available, from the manufacturer. I had the money to pay for it -- around $1400. But I went ahead and took the offer from BillMeLater. It was essentially a 12-month zero-interest credit card balance transfer loan. Sketchy bit its very nature. They spammed my inbox with solicitations, which was annoying. But I set my bank to pay the monthly amount (or slightly over, since it decreases each month) and to make the final payoff -- all at the time of purchase. This worked just fine -- but I still had spam from BillMeLater for quite a while. I still ran a slight risk that something would go wrong, at which point I'd face interest charges -- but I would then have paid off the item plus those interest charges. Luckily I avoided that. I'm not sure I'd bother doing this again, but if the sticker price was high enough, I might be tempted....

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I will take some junk mail and spam for a free loan –  MrChrister Oct 19 '10 at 16:41

Zero percent interest may sound great, but those deals often have extra margin built into the price to make up for it.

If you see 0%, find it cheaper somewhere else and avoid the cloud over your head.

(Bonus points for extorting credit card benefits on a marked down item... And paying off the credit card right away of course :)

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I would never consider such an offer. As has already been mentioned, there are likely to be hidden costs and the future is never certain.

If you feel that you are missing out, then negociate a lower purchase price now. People often forget that something is only worth what someone is willing to pay for it. With any significant purchase it's always worth bargaining.

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Read the fine print and you will be fine.

The big caveat is that if you miss a payment for any reason, you will be in default as far as the promotional financing is concerned and will typically owe ALL of the accrued interest, which is usually computed at 20-25% per year.

Personally, I use these sorts of offers all of the time at places like Home Depot for stuff that doesn't generally need warranty service. (Wood, tools, etc) Usually I pay the thing off over time as CDs mature.

If I'm buying a TV, computer, etc. I always use my AMEX, because I get an extra year of warranty service and points for free.

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One rule : Always pay in cash if you can.

I speak about culture to get to the point.

I know in some culture, credit is very easy but in culture like mine, cash is the King and credit is only for the big plans, big expenses like a house for example.

Like i see in previous comments, you cannot predict the future. If you can pay in cash, then do it. More than the advantage/disadvantage you can see the money go out from your bank account, you will think about twice about the second purchase etc etc.

You can really see the money go out, this experience is more complicated with credits, has we may expect.

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