Comments on: Interest Free Financing and Cash Discounts

By: Andy

Andy — Wed, 25 May 2011 15:26:49 +0000

There are a lot of good points mentioned here about cash discounts, avoiding consumer debt, and depending on future cash flows to cover debt, however ….

If you have enough cash to cover a large purchase, in most cases you would be wise to leverage it with interest-free financing rather than paying everything up front. Not having bills/debt is a psychological benefit, and not necessarily a financial one. Basically, by paying the full price at the time of the purchase you are paying a premium by forfeiting any future income that could be earned on your money over the life of the financing term. A simple example would be the interest earned from a savings or money market account over the life of the loan. This is not to mention other time-value of money benefits (which I won’t get into here).

There are of course obvious caveats. You need to make regular payments so that the balance is payed down before the interest free term ends. You need to be cognizant of not over leveraging yourself, especially on consumer goods that start depreciating the moment you gain possession of them.

By: LeanLifeCoach

LeanLifeCoach — Sun, 14 Feb 2010 01:19:10 +0000

We do follow a strict “if you can’t pay cash policy”, but we do use cc for convenience that is always paid off before the close off the month.

I haggle routinely even when paying with cc and have found that virtually anything is negotiable, cash or credit.

By: John

John — Fri, 12 Feb 2010 04:10:17 +0000

I have used 0% financing on a few items and so far have not slipped up on a deferred interest program. I think they are a good deal if you manage them properly. The problem can be the number of individual payments you have to make every month to keep it interest free. I currently make 7 loan payments per month and I don’t plan on taking on any more until that number is down to 3. I can see how a couple could easily generate 15-25 loan payments per month plus all the other service bills and then it gets really easy to miss something.

One of the benefits of Dave Ramsey’s debt snowball is the elimination of discreet payments.

By: Rosa

Rosa — Thu, 11 Feb 2010 22:59:30 +0000

I wouldn’t do debt for furniture – I don’t even have a really rational reason, though it does fit into the “never borrow for anything that doesn’t appreciate” rule. Especially for a couch – a solid wood piece seems permanent to me (or at least resellable) but a piece of upholstered furniture loses value really fast. What if, in that 0% year, you got a new job and moved across the country – is the couch valuable enough to move, or do you abandon it not all the way paid for?

I have had really good luck getting serious deals on the few pieces of furniture we’ve purchased, without using cash – both pieces of furniture we own that cost more than $100, I bought with a credit card. One was from Ikea, where prices are pretty standard. The other was from a non-discount retailer but we got a discontinued item that had been the floor display and on a day they were having a sale – ended up paying about 1/3 the original sticker price.

I think I would classify furniture as a want, not a need – like a painting, or nice stemware. You can get by just fine drinking out of jelly jars, but if you have money for nice glasses they’re nice to have (and when you have kids they’re probably get ruined anyway.)

By: Andrew

Andrew — Thu, 11 Feb 2010 22:00:48 +0000

I don’t understand why there is such an aversion to credit cards here. I presume if you’re reading this site then you already understand simple cash flow. (maybe you don’t but nearly every single post brings it up)

Everyone here will say “don’t spend more than you earn/can afford/etc”. With that in Mind, Credit Cards become real financial tools, 30 day interest free loans almost. So when you get those special 0%apr financing offers, you can quickly estimate additional savings by only paying the min payments, and the payoff near the end of the promo period. The interest you earn on the price of the product (principle) in the end, becomes the savings on the product.

Obviously many will disagree because everyone has differing levels of risk aversion.
There’s 0% apr, and then there’s this:
http://www.fivecentnickel.com/.....rd-offers/

which on paper, is actually less riskier…

By: Matt Jabs

Matt Jabs — Thu, 11 Feb 2010 20:17:01 +0000

@Steve Kang: One benefit is to support your local retailer instead of a global corporation. For me, buying local and paying a bit more is well worth it… after all, price isn’t everything – right?

By: Chris

Chris — Thu, 11 Feb 2010 16:23:02 +0000

I still wouldn’t play the retail interest-free loan game. The risks are simply too high. Before you say “I never make a late payment” consider the chances of you, your bank or retailer screwing up the transaction, ultimately landing you a bill for full interest since the loan started and a lot of phone calls & fights. IMO the interest you can earn on that money is far outweighed by the inherent risk of a retail 0% loan.

By: therealdebtsolution

therealdebtsolution — Thu, 11 Feb 2010 16:20:56 +0000

My advice or 2 cents is to stop using credit to buy minimal items. 0% financing sounds good but the problem is that you don’t know what your financial future will be like before the “free financing” period is over.

Also in the article the author stated that the “free financing” caught his attention. The problem with that is how many other “free financing” offers would he be attracted to with a time period?

Financing items like this is the main reason why we have a problem saving money. Free Financing of the couch, then the microwave, dvd player, plasma tv, etc, etc.

Yeah you used someone-elses money, but their game is to have you slip up and then they will have you in INTEREST PAYMENT HELL!!!!!

And if you look at the resent credit card company profits you’ll see that 99% of the people “Slip-Up”.

By: SteveKang

SteveKang — Thu, 11 Feb 2010 16:15:27 +0000

I’ve encountered large businesses simply don’t care how you pay. I’ve used several of the haggling tactics mentioned here. But the larger businesses tend to have the better price regardless of your payment method. I encountered this when I recently bought a car.

But if I flash cash to a small business, they’re more likely to haggle because I’m mainly dealing with the owner. But the trade off is his prices are higher because he make move the volume of inventory like the big chain stores. So your final price, after all the haggling may end up being what the big chains are advertising to begin with. So why haggle?

That’s been my experience in the last 2 months.

By: Floridian

Floridian — Thu, 11 Feb 2010 15:39:47 +0000

I’ve found you can almost always get a discount for paying cash up front (haggling), rather than taking the zero percent financing. If you are forgoing a discount, it’s not really zero percent financing now, is it? ONE time, the merchant would give a discount for cash, so we did the zero percent financing. It was only for 6 mos though.

I don’t think anyone should take advantage of the zero percent financing unless they have the cash to pay for that item on the day of purchase. Especially with all the uncertainty in today’s economy. A friend of mine likes to use ING for tagging, or “earmarking” funds for her zero percent financing (she’s too nervous to haggle, so doesn’t even try). ING allows her to create sub accounts to stash the money in, labeling them “washer/dryer,” “HDTV,” and so on.

BTW – There is a furniture store down here offering 4 YEARS zero percent financing on purchases of $699 & up. Holy crap! I predict lots of people will get in trouble with that one – it’s even tempting for us! (not gonna do it, though – don’t need a new sofa. WANT, but don’t NEED. Ours is still very comfy, even if a bit old).

By: Matt Johnson

Matt Johnson — Thu, 11 Feb 2010 15:39:14 +0000

What you forgot to mention is that interest free financing can seriously hurt your credit score. When you take out a loan on furniture, the retailer extends you a line of credit exactly for the amount you’re borrowing. The result on your credit report is a new account with a balance at nearly 100% of the limit. Depending on how many other credit lines you have available, this can pinch your percentage of total available credit (the biggest portion of your FICO score) and give lenders pause since you have an open account nearly maxed out.

I would go for cash.

By: Olivia

Olivia — Thu, 11 Feb 2010 14:15:25 +0000

Definitely save first, buy later, and not just for the reasons you mention. If you have cash in hand you can keep your eyes peeled for a killer deal and take advantage of it when it comes up. For example we have vintage furniture (by choice as well as necessity) and were able to purchase a wonderful Eastlake side table at an antique place for far less than a new particleboard and veneer piece. (Ask for a cash discount at antique places. Ours gave 10%.) It fits in with our other furniture (Victrola case and sofa) and is just plain nice to look at and use.

By: donna

donna — Thu, 11 Feb 2010 14:13:26 +0000

Hard to argue with your reasoning.
Have used 0% financing, and also CASH! We just bought a snowblower and paid cash (hubs works 6 days a week, can’t expect him to come home and shovel right after work).
Using cash is exactly what you said, you don’t spend MORE than you can afford. Using 0% financing, enables you to spend more (I divided all paychecks (provided we are employed) into the # of months we have to pay off 0% and then pay that amount each month.
I am sure that the retailers invest a lot of time and money into studying the spending habits of the public, in order to pick their pockets as clean as they can.

By: Nickel

Nickel — Thu, 11 Feb 2010 13:20:03 +0000

In general, we put our purchases on a reward credit card and pay it off at the end of the month. Promotional financing isn’t at all attractive to me. We’ve occasionally used the cash angle when haggling on a big ticket purchase, but haven’t had a great deal of success. It’s still worth a try, though.