What does a replacement HVAC system and $400 luxury sheets have in common? Other than being able to use your luxury sheets when your heat or air-conditioning is working properly? You can make both of these purchases by receiving an interest free financing loan.
I have always been leery of interest free financing loan. It’s how they are advertised. Pay only $xxx every month and receive an interest free loan for 24 months. It reminders me of late night TV advertisers that sell products we do not need.
However, I have this type of loan with less than a year remaining to pay it off.
A little background first
When I purchased my condo several years ago, I knew the HVAC system and water heater were on their last legs. I was prepared financially for this home improvement. However, it took me many months, mentally, to decide between different contractors and the systems they were offering. I made my decision in January 2017. The installation took place on a relatively warm day in February.
Applying and receiving the interest free financing loan
Since I had put aside the money for the installation and equipment, I was not particularly interested in receiving interest free financing. However, my contractor suggested that I consider it.
He told me that I could receive an eighteen (18) month interest free loan through Synchrony Bank. He said the application process is very easy. And he was correct. He provided me with details about the account, a phone number, and their vendor code. The work was estimated to be under $10,000. My contractor’s office manager suggested I request $15,000 to be safe.
Please understand my contractor receives many benefits from this arrangement. Mainly they get paid immediately after the job is complete. Other minor benefits include less bookkeeping, paperwork, and no follow up calls to request payment.
Avoid extended credit for depreciating assets
At first, I was hesitant to apply for the loan. I avoid taking out loans for depreciating assets. Certainly, a HVAC system and water heater are not going to be worth more in the future. Personally, I do not like the pressure of having any additional monthly obligations. I always strive for simplicity wherever I can in my personal budgeting.
After much thought and personal debate, I decided to apply for the interest free financing. Being totally aware that if something were to occur, I could be on the hook for a 27% interest loan.
The deception – at least what I consider to be misleading
This is my first personal experience with interest free financing.
“I naively thought the minimum monthly amount would be one-eighteenth of the total. Thus, by the finally payment, the loan would be paid in full. How else would you pay off the balance without occurring interest charges?”
Here’s what I had expected:
- Total amount my contractor billed me: $8,937
- Activation fee (charged by Synchrony Financial) $29
- Total Promotional Balance due: $8,966
- Divide $8,966 by 18 months = 498.11.
I figured I would send $530/month and by the seventeenth (17) month, the entire balance would be paid off. Why 17 months? Because I did not want to make an error causing me to pay interest.
The first bill dated 2/23/17, however, only requested $225 as a minimum payment.
After scratching my head and redoing my calculation, I sent $530. I thought perhaps it was based upon a partial month. I did not bother to call nor thought about it until the following month, when the monthly bill arrived. Again, only requesting $225 as a minimum payment.
I decided to send $250 as my monthly payment. I am mindful of the total balance which will be due by August 23, 2018. For those that are curious, there is no particular reason why I send $250 vs $225.
At first, I was quite skeptical about receiving an interest free financing loan. My skepticism has not changed. From my point of view, the required minimum monthly payment is misleading. Adding an additional line showing the monthly payment required in order to pay off the balance due would be useful.
Sadly, this practice of low monthly payments makes consumers think they are staying current in paying their bills. I have seen this first-hand where clients were shocked at what they owed at the end of the interest free term. They end up not only paying the accumulated interest, but to continue to for months beyond the original time frame.
What are your experiences with interest free financing? Do you think it is deceptive that you are only required to make a small minimum monthly payment?
Further reading on this topic:
CFPB (Consumer Financial Protection Bureau): How to understand special promotional financing offers on credit cards
Simple Dollar by Saundra Latham: Is financing furniture with a store credit card ever a good idea?