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| The Basics | When 'buy now, pay later' is no deal
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Read the fine print carefully. Even if you qualify for one of these delayed-payment plans, the retailer may charge back interest or other stiff finance charges when payments come due.
By Bankrate.com
Everybody's seen ads and incentives to "Buy now, pay later!" or "Six months, same as cash!" or "One year, interest free!" What are these deals, anyway? Are they legitimate or some type of scam? When should people consider them? What should they look out for?
Typically these retail incentives are advertisements designed to lure buyers into the store. "They're an incentive on the part of the business to get people to buy things now that they often can't afford," says Howell Edwards, vice president of business development at the InCharge Institute of America, in Orlando, Fla. "It's not necessarily a scam, but it convinces some people that they can have these items or luxuries now without actually paying for them."
The deals are often set up in such a way that you buy the merchandise -- furniture, electronics, appliances -- and have six months or a year, or sometimes even longer, in which you don't have to make a payment. Or you pay no interest on your payments until a set date. Depending on how the deal is structured, if you pay the entire purchase off under that contract period, you may not have to pay any interest. If you don't pay it off, however, the payments begin -- sometimes along with problems.
"Most people very rarely ever pay it off within that year period," says Trish Lynch, of ClearPoint Financial Solutions, based in Richmond, Va. "Usually, they get that year with interest free." Then, unbeknownst to many consumers, the finance company applies interest retroactively, effective from the date of purchase or delivery, she adds.
Words of caution
If viewed primarily as a marketing ploy on the part of the seller, whose principal goal is to get buyers through the door, then it's easier to understand some of the potential traps associated with these deals.
"The one thing consumers need to know is that most buyers may not be eligible to take advantage of these types of offers," says Sheila Adkins, associate director of public affairs for the Council of Better Business Bureaus Inc., in Arlington, Va. "Oftentimes, merchants require impeccable credit. And sometimes, even for those who do qualify, the offer is restricted to a particular model, brand or style and with limited terms."
If these types of marketing campaigns are legitimate, though rife with possible brambles to get snagged on, what should the average consumer look out for? What thorns lurk inside this tantalizing bed of retail roses?
First, assuming you qualify, can you afford this item? Not just now, but later, when the billing starts? "If you can't afford it now, you shouldn't take part in these kinds of deals," says Edwards. "The debt doesn't go away, you're just delaying it. There's no guarantee what your financial situation will be down the line or in a year."
Lynch agrees. "A lot of times people are using these no-interest, buy-now-pay-later deals for things they don't have to have," she says. "A lot of it is old-fashioned going back and quantifying what is a need and what is a want. If it's a want, it needs to wait; it needs to be saved for. They should only use this type of situation when it's an absolute need."
Secondly, understand what you're getting into. Jay Seaton, president of the Northeastern Ohio Consumer Credit Counseling Service in Cleveland, says, "People have to understand all the rules of the road going into it. The risks are that all the accrued finance charge potentially is due and payable if you don't meet the requirements of the contract. That defeats the whole purpose of 'three months, four months, six months, nine months same as cash.' That's not the same as cash. That's the major risk."
Potential buyers need to read the fine print in the buyer's contract. Look for answers to these questions:- Do you need to make payments along the way?
- When, exactly, are payments due?
- What penalties are you likely to have to pay if you don't follow the contract precisely?
- Does the overall interest rate increase because of the deferral?
- Are there additional handling fees that have to be paid to defer payments?
"Consumers aren't aware of the hidden charges and the different things that might be charged," says Lynch.
Thirdly, make sure the deal applies to the product you're interested in. "Consumers should compare prices and quality of the merchandise," says Adkins. "Make sure they are getting the best possible price. At some stores, these types of offers may apply to certain products, but not others -- and for different periods."
Oh what a deal!
If the working assumption is that these kinds of incentives are scams, should consumers stay as far away from them as possible? Not necessarily. In some cases, and for some people, these can be terrific deals.
"First off, you should look at your own circumstance," says Seaton. "Is this an item you want? If I want it, what is my financial circumstance going to be? How can I improve my financial circumstances in the six to nine months that it's going to take me to acquire the money to pay this all off? If I think it's going to be any different, then I might want to think about not doing it. If it's going to be positive, then I might want to do it."
If you as a consumer have good credit, cash in the bank and control of your finances, it might be a good route to take.
"It's actually an excellent idea if the consumer is disciplined," says Lynch. "They might get a thousand-dollar refrigerator, and if it's paid off in a year, they're not going to have to pay any finance charges. They tell themselves that they're going to pay a hundred dollars faithfully for 10 months before that year is up. Certainly it's a great thing to be able to do, but you have to have the discipline to do that."
Prioritize your purchases
That plasma TV would look pretty great hanging on your wall, wouldn't it? Nothing wrong with wanting it, except of course that it's very expensive; and approximately the same price as a one-week vacation for a family of four to Disney World, including airfare. The local appliance broker is offering a deal, though. Buy it now, and for the first year, you pay no interest. Should you make the leap?
If this TV costs $7,000 and you just can't afford a $7,000 TV, then maybe this isn't a deal you should even consider. Buy the 32-inch regular TV for $400 and don't run yourself into debt.
But maybe you're expecting a year-end bonus from your job that will be about $4,000. You could make the interest-free payments until then, and then pay off the TV when the bonus comes in.
What if the year-end bonus is only $3,000 and you can't pay it off completely? Will you still be stuck making high-interest payments? Read the agreement carefully. How large will your payments have to be that first year?
"Consumers should keep in mind that credit costs money," says Adkins. "While delayed-payment plans allow you to purchase what you need or want when you do not have the cash upfront, you usually end up paying more for the merchandise when you buy it on time."
Use a pragmatic approach
Perhaps the best way to approach this is to modify your personal spending philosophy. Instead of thinking of this purchase as an item for yourself, think of yourself as a corporation -- You Inc.
"Think of yourself as a small business," says Seaton. "What is the rational way to approach this transaction? View the transaction the same way you would something in your job -- much more rationally than people do. And these particular deals, you really have to look at them with that kind of hard-eyed focus, rationally."
A careful inspection of your balance sheet, displaying your assets and liabilities, can help you make a decision about whether that purchase is good or bad for your bottom line.
-- Mark Terry, Bankrate.com
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