Interest Free Financing and Cash Discounts

Interest free financing presents us with an opportunity to borrow money for free while investing with the possibility of greater gain. On the other hand, using cash for purchases can save us money immediately by increasing the likelihood of a discounted purchase.

Is one superior to the other? Let’s take a closer look…

Interest free financing

One of the first purchases I made after joining the ranks of working professionals was a killer sectional sofa. Why a couch first? Several reasons:

  • My dad always kept our house furnished with the most terribly uncomfortable couches in the history of mankind, and I vowed to be different.
  • I had a brand new apartment furnished with little more than a few comfy pillows and a TV.
  • Chicks dig cool couches… right? 😉

I figured that I needed the couch, and was motivated by an offer of 0% financing for two full years at a local furniture store. I jumped at their offer of free money and, despite being new to the world of promotional credit financing, I successfully paid the couch off before the interest free period ended. I thus avoided any interest.

Although I avoided paying interest I could have better leveraged the deal by following a few simple rules before rushing into the purchase.

Here are some considerations before borrowing interest free:

  • Don’t borrow more than you could pay cash for. Using the interest free financing as a free ticket to spend will get you into trouble fast, so make sure you only spend what you could afford to pay in cash. If you have no cash saved consider saving before you buy. Having the cash saved acts as a hedge against job/income loss.
  • Be organized and knowledgeable. Become intimately familiar with the terms of your purchase and pay careful attention to the details of the “interest free” period. Know how long you have before interest kicks in, and whether or not you will be charged interest on the entire purchase amount after the promotional period ends – regardless of amounts owed. Deferred billing programs can be tricky, and knowledge is your friend.
  • Investing your cash. How much can you truly expect to earn on your cash during the time span under consideration? The stock market really isn’t appropriate for such short timeframes, and even altrernatives such as Lending Club have a three year payback period. Thus, even if you select your investments carefully, this sort of investment probably isn’t what you’re looking for. In truth, you should probably be looking at truly risk free investments, and the rates on CDs and high yield savings accounts just aren’t that attractive right now.

I was able to borrow free money to buy my couch without getting burned, but looking back wish I would have considered other options before accepting a loan based solely on an offer of promotional financing.

Cash discounts

Debt advocates like Dave Ramsey argue that using cash for purchases can help you secure better upfront discounts while preventing entanglement in questionable financing programs.

Every time I make a purchase, I ask for a discount. My wife hates haggling, but never argues with the results. 🙂

Here is a summary of cash discount tactics to try:

  • Be courteous. You catch more flies with honey than with vinegar.
  • Flash cash. Visual stimuli are very powerful and can make quite a difference.
  • Use the silent treatment. Name your price and use awkward silence to your advantage.
  • Know your haggling lingo. Phrases like “Is that the best you can do?” can work wonders. Put them in the position of having to say no.
  • Be willing to leave without buying. Determine your maximum price ahead of time and walk away if it cannot be met.
  • Understand who holds the power. You are the buyer, they are the seller. If you don’t buy, they can’t sell. Never forget this.

Final thoughts

When properly employed, either approach can benefit your pocketbook. But if I had to choose, I would pick cash discounts over promotional financing. Here are three reasons I like cash:

  1. Immediate and guaranteed returns. Receiving a cash discount happens immediately, and is not subject to any sort of risk, penalties, etc.
  2. Avoiding questionable financing programs. I hate bills, and I hate finance charges. If I pay cash up front I am 100% sure to avoid both.
  3. More likely to buy within my means. Using cash for purchases makes spending beyond our means harder since there is only so much cash to spend.

When I use cash, I make my purchase, secure my discount, and walk out the door. End of story.

Which do you prefer, and why?

Do you prefer using cash to secure a possible discount, or are you more likely to see greater returns by taking advantage of promotional financing programs?

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14 Responses to “Interest Free Financing and Cash Discounts”

  1. Anonymous

    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.

  2. Anonymous

    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.

  3. Anonymous

    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.

  4. Anonymous

    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.)

  5. Anonymous

    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/how-to-profit-from-0-balance-transfer-credit-card-offers/

    which on paper, is actually less riskier…

  6. Anonymous

    @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?

  7. Anonymous

    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.

  8. Anonymous

    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”.

  9. Anonymous

    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.

  10. Anonymous

    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).

  11. Anonymous

    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.

  12. Anonymous

    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.

  13. Anonymous

    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.

  14. 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.

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