We’ve all seen the ads, heard the commercials…“Buy now, 12 months same as cash!” Are these deals good or bad? Are they a rip-off? What’s the catch?
They may not be a rip-off as long as you pay off the loan within the specified time period. By paying off the loan within the specified time, you avoid paying interest and you get the flexibility to pay for the item over a period of time instead of paying for it all at once. In that scenario, I believe these deals to be good.
However, not everyone pays off the loan within the specified period and that is when these deals begin to look bad. A lot of people think they will pay off the loan and don’t bother reading the fine print that says; “If you do not pay off the loan within the 12 month promotional period, all accrued interest will be charged.” There’s the catch. ALL accrued interest will be charged. Usually these deals have interest rates from 12% to 35% or even higher. This means that the $2,000 item you purchased will end up costing you $240 to $700** more if you go 1 day past the promotional period.
The interest charges can easily be avoided by paying off the loan before the promotional period expires. Hopefully you have been making payments (more than the minimum), so the remaining balance should be reasonable. If you still do not have enough cash to pay off the loan at the end of the promotional period, it might be in your interest to borrow an unsecured loan from your credit union and pay off the original loan. At UKFCU, our unsecured loan is as low as 9.99% APR*, which is lower than 12% and much lower than 35%. Also, if you open a loan in the 12th month of the promotional period to pay off the original, you will avoid the interest that has already accrued, your balance is less and you can set a term that will make your payments affordable.
So in the example, you purchased a $2,000 item on 12 months same as cash. You have been making $100 payments for 11 months. You still owe $900, but you do not have enough cash to pay it off. If you let the promotional period expire, you will owe an additional $240 (12% interest) and the interest will continue to accrue. If you go to your credit union and borrow $900 at 9.99% APR* for 12 months, your payment will be $79.12 for 12 months and you would end up paying $49.44 in interest. That’s a savings of at least $190.
As always, it pays to read the small print.
* Annual Percentage Rate. Rate based on credit history. Other restrictions may apply. See a representative for details.
** Using the interest rate range specified. If your interest rate is higher, the cost will be higher.