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.
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.
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.
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:
- Immediate and guaranteed returns. Receiving a cash discount happens immediately, and is not subject to any sort of risk, penalties, etc.
- 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.
- 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?