Buy Now versus Interest Free or Pay Later (Deferred) Plans

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 Deferred Buy Now Pay Later Interest Free

After moving into my new place, one the big ticket items that I planned to purchase – nay, splurge on – was a big screen plasma TV for the family room. I did my research and found a Panasonic 58” model that I was able to negotiate down to around $2000 (with a Blu Ray DVD player and 4 year warranty) – a $500 saving! However, when it came to paying for the TV, I had two options. I could pay the $2000 up-front on my credit card or defer payment with a 12 month, interest free loan that only required 3% monthly repayments. Having to put down less cash up front seemed like a great idea, especially given all the other expenses around purchasing a home. Before committing to either payment option, it is important to do some research and understand the impacts on your current and future personal finances.

Paying up-front is the easiest option. But it means that I need to have $2000 now or in a month when my credit card bill is due, since carrying credit card debt with 15%+ interest for an item I can live without is not the smartest idea in the world. While I do have $2000 in my savings account, buying the TV up-front would definitely affect my cash flow for the next few months which is what made the deferred payment option worth considering seriously.

Under the deferred payment option I have to sign up for a store credit card to take part in the 12 month, no-interest promotion. There was also a requirement to make small principal repayments of 3% ($60 per month) for the next 12 months. However the real catch, and what makes this deals so dangerous, is that after 12 months if I only pay the 3% minimum I would still owe $1280 ($2000 – $720) on the TV, which would then be charged interest on at 27%! At this rate my bad debt (which is what it really is now) would double every 2.5 years if I only continued making the required minimum repayment. Further, if I am late on repayments in any month, I would be charged penalties and interest on the whole balance.

With the above conditions, the interest free option is only a good one if you pay on time or early. But if you are late on any payment or worse cannot pay the full balance when the promotion period expires, you could be in real financial trouble. A number of stores and vendors are running interest free and/or deferred payment promotions, which may be good deals for some, but here are some key factors to consider before signing up:

- In most cases to take advantage of interest free of deferred payment promotions, you must sign up for a store credit card. There are various versions with different conditions depending on which store you purchase from and which product you sign up for, but at the end of the day these carry the same benefits and risks as regular credit cards.

- “Buy now, pay later” or “No Payments for 12 months” type promotions are sold on the premise that the consumer is not required to repay the full cost of the purchase until the end of the promotional period. What is not always made obvious in the promotional advertising is that the purchaser is still required to make minimum monthly repayments in addition to an ongoing monthly “account keeping” fee prior to the end of the specified period. However just paying the minimum amount required could get you in trouble as well, especially if paying the minimum amount does not clear the loan before the interest free period ends. The outstanding amount will be charged interest at very high rates (25 to 30% is quite common). Therefore it is wise to make regular monthly repayments to pay off the full balance, rather than leaving it until almost the end of the term and hoping that you have a lump sum of funds to pay off the balance in time.

- If you feel that you may not be disciplined enough to make the repayments in time it may be a good idea to look at taking out a personal loan instead. The interest rates for unsecured personal loans are generally much lower than those charged on the “buy now, pay later” plans after the promotional period expires.

- One of the other traps to be aware of is related to multiple purchases. Once you are issued with a store card it is at your disposal to purchase multiple items from various in-store promotions. This complicates the repayment process somewhat as it is not possible to direct your funds to a particular loan. This is a risky choice, particularly if you are not 100 percent confident in your ability to correctly calculate owed monies and associated costs, and could result in a lot of unnecessary extra fees and charges.

- There’s usually a minimum that you have to spend to qualify for these interest free purchases which can make you end up spending more than you usually would. Watch out for this and don’t buy just for the sake of qualifying for the promotion. On the flip-side, if you are buying a big ticket item, most stores would be willing to work out a repayment plan with you or give you some kind of discount if they cannot offer a plan.

- Read the fine print and make sure you understand all the fees, key dates, terms and conditions. Don’t be afraid to ask questions – it is your money after all. If you cannot repay the loan amount before the interest free period ends then sometimes a low rate credit card can be a better option. So consider all your options and do your sums before you make the decision.

Take your time and do not sign up for these types of offers without looking into the details and crunching the numbers under various scenarios. Also, think really hard about short term (3 months or less) no-interest or deferred payment deals. If you cannot afford the purchase now, do you really think you will be in position to do so in a few months? Even for the longer term deals, you should apply the same logic. Sure your cash flow will be better for the duration of the promotion period, but will you be able to absorb the big payment when due.

Here’s my basic rule: If you can afford to pay for the item, buy it now (which I did). If you expect to have a number of larger, higher priority expenses in the near term and will be tight on the short term cash flow, then consider a deferred payment plan that is at least 6 to 12 months in duration. If neither option is feasible or available, then don’t buy the item.

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