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Should Kate risk financing furniture?
Yesterday DFA reader Kate asked:
“Last night I was discussing with my friend about buying furniture at Rooms To Go. They are always advertising this amazing no interest, no payment deals and I am in the market for something for my dining room. She mentioned to me that as long as I paid off the furniture before the allotted time, it was a great deal. However, if I had any balance left after the advertised period, not only would I be charged interest on the remaining balance but on the full price of the furniture. Of course, I would make monthly payments to ensure I didn’t pay any interest, but it made me think that I needed to be careful on the amount I spent.”
Promotional credit financing
What Kate is referring to is called “deferred billing” and/or “promotional financing.” Basically the seller will offer either deferred billing, deferred interest, or both for a specific promotional time period. Interest on such purchases typically accrues from the date of purchase and is then charged to the account if the balance is not paid in full before the promotional period expires.
Like many other financing offers, these waters should to be tread with caution.
Here’s what I would do Kate:
Firstly, be aware of the purpose of these creative financing programs: they remove barriers to buying. Marketers put it this way, “Promotional financing makes higher-priced items more affordable to a greater number of potential buyers.”
From the marketers point-of-view, just because someone doesn’t have the money now doesn’t mean they can’t buy. Appealing financing terms are offered to turn browsers into buyers.
So the question to ask yourself is… should you buy the furniture now, or would it be wise to save money and then buy the furniture?
If you actually do have the money saved (which I don’t think you do), you could use their free money for the span of the promotional period and let your money continue to earn interest. But if you do not have the money saved then you should be careful not to presume upon your future ability to earn. For example, what happens if you lose your job during the promo period? If you cannot find an alternative income source you run the risk of not being able to pay in full before the deferred billing and interest kick in, thus consuming any savings you originally may have had.
If you save the money then buy you delay your purchase, along with your gratification, but reduce your risk and increase your likelihood of a positive ROI.
Saving money, then buying will allow you to wheel and deal with your wad of cash – Dave Ramsey style. You won’t have to worry about losing your job and not being able to pay for the furniture. Also, if you save a specific amount you are limited to spending that specific amount, which takes care of your second concern of spending more than you should.
To combat the delayed gratification and temptation monsters, go to estate sales, garage sales, and 2nd hand stores for temporary furniture while you save for the new. This is not the modern American way… but it may just be the wise financial way. Who knows… you may end up liking your “temp furniture” so much that you no longer desire new furniture… then you can use the money you were saving toward something else!
What do you think?
What would you do if you were in Kate’s shoes?
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