Credit Financing and Deferred Billing – Kate Answered

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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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1 Early Retirement Extreme

Technically the company finances the consumer and thus the company has a claim on the consumer (who is now the financing company’s asset) much the same way as they could have a claim on a junk bond. Now, if the consumer takes the money and buys a chair it would be somewhat of a stretch to call that part financing since the cash stream from the furniture is zero. It is simply consumption.

The payment terms are important. If paid in time, it amounts to price reduction comparable to the discount rate. Usually about 10% per year. That’s not a whole lot. But it can be used to negotiate. Ask to speak to a manager and say you are onto them and ask what their price reduction would be if you paid upfront. If it is not at least 10%, then they don’t know what they are doing (quite likely since the deal is probably put together higher up). For furniture, 10% off is not a remarkable deal at all.

If not paid in time, you will be paying full price plus interest. The interest rate will be structured so that the company makes some money on this. It would be hard to arbitrage here.

The best deal would be simply to wait for a sale and then move in with cash. Alternatively, you can pick up used furniture for almost nothing. New furniture has many things in common with new cars.

2 Kyle

Early Retirement makes a good point, you can almost always save more by paying cash upfront. I agree with you Matt that if you are going to finance it, do it because you have the cash to pay on hand and just want to continue to allow it to earn interest for you. Don’t take on a debt if you can’t afford to pay it off immediately if the need arises.

3 gn

Don’t buy new electronics, furniture, exercise equipment, etc until you’ve spent at least 2-3 months getting a sense for what you can score “used” for a fraction of the cost. Incredible what you can find on craigslist…

But you have to fight the impulsive gotta-have-it-now thing and wait for something you like to show up.

4 donna

I have used this method numerous times, of course it takes discipline (and a paycheck) but i would figure out how many paydays till the balance came due and divide the total by the # of pdays, and that is what i HAD TO, pay towards the purchase period. Normally i would go no lower than 12 months for large purchases, but paid off $3,000 of flooring in 12 months no interest.
I just depends on how disciplined you are sometimes?

5 Matt Jabs

If it were me, I would do what I suggested in the latter part of the article… seek out used deals and try to save a bundle and pay cash.

6 Kate

Thanks for this article! Two weeks ago I did purchase some new bedroom furniture and paid cash. It was nice to know that I did not have any future payments to look forward to on the furniture. While I do have enough money in savings to purchase some furniture for the dining room, I thought it would be nice to have the money continue to earn interest while I could make payments on the zero % financing.

I will check back to see all of the comments as they trickle in today.



7 Peter

Whenever you take on a financing deal like this you’re also taking on risk. Risk that you won’t lose your job, risk that you won’t forget to make payments when they start, etc. Personally I come down firmly in the camp that says, if you need to finance it, you probably shouldn’t be buying it (except for a house).

Buy used or save up and pay cash!

8 kayro

We bought an LCD TV from Ultimate Electronics on a 2-year no interest deal (no payments required), and a bed from the Roomstore (1 year, minimal monthly payment required).

It’s important to note that it is not the “store” you have credit with. Credit is actually extended by banks, in these cases HSBC and Wells Fargo, respectively. Despite this, these loans are considered “retail loans” and not bank loans.

One huge drawback I found out later was the negative way “retail credit” affected my auto insurance rate. My insurer (USAA) changed to rating people based on financial information. Just before I paid off these loans, the insurer’s third party rated our credit. My renewal ended up being nearly 25% higher than the year before, mainly because of these retail accounts. Note that they didn’t care IF I had an account — I was dinged because I had outstanding balance.

As it happened, they drew my financial information just before I paid off both accounts (which was a couple of months before I got the renewal information). I was really angry at the rate increase (no tickets, no accidents in over a decade but overnight I’m suddenly 25% riskier?!! Don’t get me started on THAT!)

Anyway — I obtained the rating information I was entitled to and read it carefully. I saw that I had been dinged because I had a balance on the retail accounts, so I asked the insurer to re-rate me. The rep told me that she had never seen the rate drop as much as it did on my re-rate. The renewal was still increased (ever known your auto rate to decrease? Yeah, me neither), but the increase was now much more reasonable.

The retail credit was helpful at the time — allowing us to get a TV when our current one died unexpectedly, and a bed when my husband was having back pain and needed a replacement immediately — but it has some negative financial impact that people should be aware of. (Note that not all auto insurers rate using financial data although this is increasing.)

9 Matt Jabs

Interesting Kayro… it is great that you had the wherewithal to call and get a re-rate. Some folks may have just swept it under the rug.

10 BG

Good advice Matt. The trick with these types of loans is that they are really stacked against you. You screw up once, even a little bit, and you could immediately see hundreds of dollars tacked onto the next statement.

I would avoid any and all loans that would retroactively apply interest starting at day zero, just because you were a day late on your 20th monthly payment — or even worse, a day late with a different loan altogether, hence dinging your credit score and causing a universal default on the department store loan.

Best advice is to just save up and pay cash. There are many horror stories on the internet about people getting royally screwed by this type of financing, when they original though it was a great deal.

Rooms-to-go knows about the Credit Protection act that is going into affect soon that makes these types of loans illegal — hence why they are in a campaign to get as many suckers signed up as possible.

11 Ann

We bought living room furniture this way some years ago. We paid it off within the time allocated and did not have to pay any interest, but I would not do it this way again, knowing what I know now about finances, saving & debt. I would first try finding something used & then if nothing else, save first & then make a purchase.

12 Kate

Maybe I will just look for something used. I hear thrift stores can have some great stuff during this time of year.

13 BG

Kate) Craigslist and even Goodwill are great places to find used furniture — especially Goodwill near _affluent_ neighborhoods.

We have a neighbor that just donated a slightly-used 1-year old leather couch to goodwill.

Check the craigslist entries near expensive zip codes — you will find great stuff that the owners are just trying to dump to make room for their more expensive stuff.

14 Matt Jabs

“Check the craigslist entries near expensive zip codes — you will find great stuff that the owners are just trying to dump to make room for their more expensive stuff.” (BG quoted)

This is GREAT advice Kate… you should definitely take it.

Instead of financing new furniture, make it your mission to find the nicest stuff for the best price… actually it sounds like fun to me! 🙂

15 Olivia

Thrift stores can, but try other places too as dealers tend to get the prime stuff. We’ve gotten most of our furnture used over a period of time. But then again I really like older stuff. It has character. Our comfortable sofa was a discard from an older friend’s mother which we refurbished and recovered. (It’s now about 100 and has a grace not found in newer pieces.) Our bedroom set belonged to my grandparents, Dining room table from an auction. Chairs from a second hand store. Hutch (that “just so happened” to match the table veneers perfectly) from an antique place. This one gave a 10% discount when we paid cash. So you may want to ask. Various lamps from various places. Yard sales, etc. A friend gave us an old Victrola cabinet he trashpicked. (Totally cool. After a rub down with Old English furniture polish, it looks great.) Not to say we haven’t purchased some things new, but we like to save up the cash, keep our eyes peeled for bargains, and pounce. What’s nice is if you get things you really like, they all seem to hang together. Have fun hunting.

16 Matt Jabs

Wow Olivia! I’m calling you next time I need to buy any furniture! 🙂

Great job.

17 ASB Chicago Estate Sales

Your right Matt. Estate sales are great places to find exceptional buys for furnishings and household items. And top quality too at less than new junk. We conduct in the Chicago area and still marvel at the quality items out there, and at a fraction of the cost. BYW, most of our customers are high earning professionals yet that’s where they come to shop. They’re savvy buyers, good with their money, look for real bargains, and know where to find them. Even new/er items can be found at estate sales.

18 Clayton

When my wife and I are looking for something, we just tell everybody we know that we are in the market for something. We start this about 3 months before we seriously go shopping for something. We ended up getting 95% of our living room furniture in excellent condition for free from family who was moving. Even if it isn’t the best color, refinishing a couch or table is much cheaper than buying it new, and you can add your own special touch.

19 Matt Jabs

Awesome Clayton: My wife and I did this with all our siblings “baby stuff.” They are all done having children, and we have not yet started. We took everything we wanted/needed off their hands for free and now do not have to buy much of anything if the Lord chooses to bless us w/a little Jabs. 🙂

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