We’ve all seen the ads proclaiming “six months same as cash!” and “pay no interest for a year!”
Special financing deals are common on big-ticket purchases, from computers to couches. It seems like a can’t-miss opportunity to buy something costly, put off paying for it and avoid interest charges. However, that’s not exactly how it works.
“These guys aren’t offering special financing deals out of the goodness of their hearts,” says Tom Drake, a financial analyst and the owner of the personal finance and investing website Personal Dividends. “Make no mistake. They are making money on these deals.”
While some consumers can benefit from special financing deals, many find themselves paying more in the long run. Here’s what to watch out for when signing up for special financing deals:
1. Deferred or Retroactive Interest
One of the biggest “gotchas” associated with special financing deals is the retroactive (sometimes called deferred) interest associated with some offers.
“If you pay off the entire balance during the promotional period, you’re golden,” Drake says. However, the story changes if you still have a balance left at the end of the promotional period. “These deals are still loans, and some lenders will charge interest dating from your date of purchase.”
The interest accrues over time and if you don’t pay off the entire balance before the end of the promotional period, you could be responsible for that interest. The interest might be added to your loan balance, for you to pay off over time, or you might be asked to make a payment for all the accumulated interest.
Read the fine print to make sure your special deal doesn’t come with retroactive or deferred interest. And, if it does, make sure you have a plan to pay off the balance within the promotional period.
2. No Payments Necessary
“Not only can you get interest-free financing,” Drake says, “but you can also avoid making any payments during the promotional period.” He warns against falling into this trap, though. Many lenders hope that you won’t make any payments during the promotional period, since it means they will collect their interest after all.
These no-payment special financing deals are especially common for promotions with shorter introductory periods. You might think that you have plenty of time to make your payments, but six months slips by quickly, and all of a sudden you have to start paying on your loan — and you owe interest to boot.
Even if you aren’t required to make payments on the loan, you should do what you can to reduce what you owe as soon as possible. Drake also suggests being wary of short promotional periods for large purchases. “If you can’t pay it off within the promotional period, you really can’t afford it,” he points out.
3. Added Fees
Finally, be on the lookout for added fees. Because these special financing deals are, in fact, loans, be aware that there might be loan origination fees or other costs associated with the loan.
Added fees are especially common on special financing deals related to rent-to-own situations. It feels like you are getting a great deal because the payments are manageable. However, the interest works out to be quite high, and there are situations in which loan fees are rolled into the total cost, and then parceled out over the financing period.
“No matter the deal, read the fine print,” Drake says. “Make sure you understand the terms of the special financing and that you know what will happen if the promotional period passes by and you still haven’t finished paying off your purchase. Otherwise, you might end up paying more than you think.”
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3 Sneaky Ways Special Financing Deals Cost You More originally appeared on usnews.com
