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Friday, January 4, 2019

No Interest Loan!


No Interest Loan!

A Cranky PSA

For

CRANKY OPINION SATURDAY

The following PSA is a cranky interpretation which may or may not be correct. I’m pretty sure I am correct and this is intended for my less sophisticated readers based on my recent understanding of something that had me completely fooled.  Any corrections to this understanding are welcome.

As a graduate from an actual accredited college, with a degree in economics many years before the internet,  I consider myself to be an expert in the science of economics.  Does a “C” average or less make one an expert?  It does if you say it does, so…

Anyway

I recently became aware of something which almost cost this economic expert a boat load of money.  I was misunderstanding a no interest loan.

Fortunately, Mrs. C, who has an associates degree in computer stuff from DeVry the school with the Fighting Mice mascot, straightened me out.

Have you ever wondered how companies offer products for sale with no interest for one year?  Sometimes even no payment and no interest for one year.  Guess, what?  There is a catch.

It is not a “no” interest loan, it is a “deferred” interest loan.  What does that mean?

Well, when you sign up for this loan it is a salesman who explains it and it may be explained incorrectly with a lot of fast talking involved. The fine print, where you sign that you understand the loan, is pretty clear, but you are not encouraged to read the fine print carefully.

If you read the fine print carefully or have someone with an associates degree in computer stuff from DeVry with you, you will know that:

The loan is interest free as long as you pay it off completely in one year.  

The monthly payments they demand, if any, will in no way cover the loan in one year. 

If you miss or are late with a single payment the interest is no longer deferred.

You may think, as I did, that the first year is interest free and then after that you have to pay the interest on the remaining balance?  Oh no.  The interest is deferred.  That means that after one year if the loan is not completely payed off, or if your last payment is even one day late, you owe all interest on that year that would have been due on every payment.

In other words, all the interest you did not have to pay was deferred, and you now DO HAVE TO PAY!!

Last year we had to replace our heating and air system.  Well we didn’t have to replace them, but they were broken and repair was going to be expensive and not guaranteed.

This was a costly proposition, one that I was prepared to pay for in one very painful lump until the salesman offered a no interest free loan for one year.  I thought, hmmm, no interest versus losing the interest on the large lump sum.  Why not take the year to pay it off?

See what an economic expert I am.  Pay no interest while still making interest, a no brainer.

My last payment was due this January.  I was set to finish payments in January.  Mrs. C said I should pay it all off in December just in case there is any glitch in the payment.*

 “Why, how much interest could there be on the last payment?”

She then explained how “deferred” interest works.

“Woah…I’ll bet a lot of people that cannot pay off the loan in a year make a purchase based on the no interest for a year concept!”

“Probably, and if they expect to pay off most in the first year, they may not care much about the interest rate.”

“Good point!”

I made my last payment one month early and confirmed it was complete, so thank you Mrs. C, and kudos to the Fighting Mice.

Are banks and businesses that offer these loans guilty of breaking the “Truth in Lending” laws?

Probably not, but they do not go out of their way to be sure the borrower understands.  I know because if they fooled this sophisticated “C” student in the science of economics, they are fooling of lot of other people.

End of PSA.

*(Know when your deferred interest period ends. The front page of your bill shows when the deferred interest period ends. Your deferred interest period might have a different end date than your regular monthly payment due)
I call this a trap!!




13 comments:

  1. Wow..Good to know. Lots of good info here. Thanks for the PSA. Passing it on to my kids.

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  2. I've known about this for years, because the very first time I saw such an offer I read the fine print. That's something I learned from my mother, "when someone hands you paperwork, read every word before you sign anything, even if you need a magnifying glass".

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  3. My experience has been that the product seller I’m buying who offers me such a loan carefully explains if the loan isn’t paid off at the end of the year what occurs with that years interest becoming part of the balance being paid back after that.

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  4. Mrs C is correct. Loan companies rely on the interest. Often, it is worth more than the item you are buying - e.g. furniture, electrical goods, cars etc ... offered on deferred interest terms.

    God bless.

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  5. I actually knew about this one. I had a young salesman who sold me a lawnmower on those terms.
    He said pay it off on time or the finance company will eat your lunch.
    I made sure it was paid off on time.
    R

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  6. I agree, it is a big trap! They really try to push it, offering you discounted pricing, if you do the loan. Which tells me, they must be making a lot of money scamming folks.

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  7. In dentistry (and veterinary offices) we've had these financing plans available to patients for years. At first I simply explained the benefits until I had one patient who only paid the "minimum" and when she was close to her year, she called me in a panic....she finally understood that if the bill was $1,200 she should have been making payments of $100 per month. Luckily for her I was able to intervene and extend her loan for another 6 months. But from that point forward, I made sure to explain the "deferred interest" concept for everyone. Recently we had a visit from one of the rep's of the company, and she correctly stated it is deferred. I don't see it as a "trap", but a way for people to be able to afford the crown they need now. And there are lots of folks out there that would lose the tooth instead of having restorative work done because they might not have $1,200.

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  8. I knew this and I go for them every time. Like your wife, we pay it off at least a month early and often several months early. I don't want to give them any more money than I have to.

    Have a fabulous day and weekend, Joe. 😎

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  9. Yikes, I didn't know this Joe. I did buy some furniture like that once but I knew I could pay it off in a year so there were no surprises. Pretty sure there was some interest built into the total price but it worked for me. Sure glad now I kept to my schedule. Thanks.

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  10. This is one reason I pay my credit card bills IN FULL every month!!

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  11. My Hick is no Mrs. C, but he's pretty shrewd with money. I rely on him for loan decisions, of which we've had very few, namely the house and several cars.

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  12. I found out the hard way some years ago..never again! I was one day late. The stupid part was I had the money to pay for it in full when I went to buy it. Oh well, live and learn! You were smart in 2 ways..one, marrying an angel like Mrs. C, and two, listening to said angel!

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  13. It is a trap. Some of these loans, if you pay it off in under a year, you truly do not have to pay any interest. If you are even one day late, they tack on interest from day one. Of course they don't want you to know all of that, they are counting on you ending up paying them the interest. It's sad how they use these shell games.

    ReplyDelete

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