From time to time you’ll see an offer from electronic, home improvement, or furniture retailers for a no payment no interest plan. These promotions are especially popular November to March when people typically don’t make expensive purchases.
Buy today and don’t pay for 12 months with no interest is usually the headline. Setting aside the problem that our brain tends to think that means it’s “free,” and we tend to be wildly optimistic that it won’t be a problem to pay off, you need to be aware the no interest part is really tricky.
These finance offers are handled by large finance companies, and not by the retailer you’re shopping at. Most commonly, it’s GE Consumer Finance. If you buy $3,000 on the no interest no payment plan, you have to pay it off before the 365th day no matter what. One day after that, the interest at usually 30% is charged retroactively to the day of purchase.
In other words, an hour late costs you the full interest at about seven to 10 times the rate of your credit line, and close to double your credit card rate, or $900 interest. The no-payment part assures the vast majority of people don’t mail something in each month to reduce the balance. The typical thinking is why should they, it’s interest free. The problem is that the full $3,000 is hard to come up with in the last few days! Small wonder over 80% of people don’t pay it off and now pay the almost 30% rates, and that’s insane!
But there’s one more heads up that’s really nasty and you need to know: If you make your purchase on the 1st of December, the balance has to be paid off by November 30st next year. That makes sense – it’s one year. But it takes the store a few days to send the contract to the finance company. So their statement date will be the 4th or 5th of the month. So, a year later you see the statement that shows yours $3,000 balance with a due date of December 4th. However, that’s your statement date and NOT your end date for the no-interest!
Stay away from these types of offers. If it’s the only way you can afford it – you can’t afford it. If you play with fire, one of these days you will get burned. But, if you ignore my advice, and don’t want to get burned badly, divide the total amount into 10 or 11 months, and send one-tenth or eleventh of the balance each month. It’ll make sure you’re paying it down and never get near the deadline and the 30% rate.