Many retailers say they're making it easy to buy big-ticket gifts with 0 percent financing, but those no-interest deals can be very risky for shoppers.
Holiday shoppers are bombarded with offers to put off paying for items like a new computer, a state-of-the art refrigerator, or an Ultra HD television. With a bevy of cool, new electronics and other items, sometimes it takes little convincing for consumers to finance big purchases.
“They’re really not thinking in terms of, this is an item I don’t have the money for right now. I’m going to buy it right now, but I really haven’t made any preparations for that,” said Scott Bennett of AAA Fair Credit Foundation.
A new survey from Cardhub.com finds about half of the big-name retailers this season offer financing deals that charge what's called deferred interest. That means if the purchaser does not pay off the full balance, or misses just one payment during the promotional period, they must pay the full interest rate on the original balance, no matter how much of it they’ve already paid off.
“This can be $50, $100, $200 depending on how expensive the item is you bought,” Bennett explained.
He said deferred interest plans are much different than buying items on credit cards with 0 percent annual percentage rate introductory offers.
“Credit cards can’t do the retro, the retroactive interest, which is what these other places are doing,” Bennett said.
Here's how deferred interest works:
Credit card: Say you buy a $2,000 TV on a credit card that offers no interest for 18 months. If you're late on the last payment, you might have to pay around $2 to $5 in interest.
Deferred offer: If you're late with that last payment for the same TV bought on a deferred interest plan, the interest goes back to the beginning. You end up paying $350 to $520 in interest charges.
“For some people that’s a huge chunk of dollars,” Bennett said, “so that can be the difference between paying the rent for a month, being able to afford groceries, so you can make that payment.”
CardHub said nearly one-third of the big-name retailers who offer deferred interest plans are not very transparent about their terms. That means the information is buried deep in the fine print, and don't expect the right answers from the sales staff, Bennett said.
“Most of them are not finance people," he said. "Their job is to know the product they’re selling."
A deferred interest plan can work if the consumer knows all the terms and follows them, Bennett added, but watch out for the unknowns.
“What if something comes up? You lose your job, you have a hiccup, you have that unexpected emergency that makes it hard for you to make those payments. What’s going to be the total cost to me?” Bennett said.
So, consumers who want to charge a big purchase are likely better off using a traditional credit card instead of retailer financing. Layaway could be an even better offer because retailers do not charge interest for that.
Another option would be to check interest rates at a credit union or bank.