With the financial crisis as it is, many retailers are luring customers with 'Buy now - Pay later', 'Zero percent financing' and other deals to let you take the product home now, and pay for it later, is it really a saving or is it a way to extract even more cash from your pocket?
Remember, no matter what they call it, somehow the purchase is being financed, and the financer also wants to make money on the deal, how do they do this?
- A majority of people don't have the money when the term has expired, which means that you will suddenly be stuck with a loan. The interest rate can run up to well over 16%
- 'Administration costs' are often charged, sometimes up to 50 euro per transaction.
When buying a laptop last year I was tempted to take up the buy now pay later deal that Dell offered me, but after a simple calculation I decided against it. The purchase price was approximately 700 euros and I had the money, but what if I put the money into my savings account for a year? I would actually be making some money off the interest!
Unfortunately the Administration costs were 30 euros, that's approx. 4.3% of the purchase price. The best interest rate I could find at the time was 3.5%, which meant I would actually be losing money. You should always check all the costs involved before purchasing.
For a larger purchase (say over 1000 euros), the calculation sheds a more positive light on the calculation, but there is still the other factor to consider...
Paying it back sounds simple enough when you buy the goods, especially if you have the cash, but it seems that a majority of purchasers do not actually pay the amount back on time! Whether this is due to to unexpected financial problems, or other reasons, it means your interest free loan is no longer interest free and you are sure to pay over the top fees for your purchase.
My advice is, only buy something when you have the cash, it will give you much more peace of mind than being stuck with a loan.