Managing Your Money

“Buy Now, Pay Later” deals may have you paying a lot more than you bargained for

I have written before about the “spend versus save” decisions which we are faced with every day, and how so many people don’t realize that every one of those decisions will have an eventual impact on their future financial position.  “Should I buy the newly released iPhone NOW (exciting)….or save for my future (boring)?”  Today’s society puts a lot of pressure on us to buy now, and marketers do a great job of making us feel that our wants are actually needs!  Having a plan, can help keep your needs vs. wants in check.  However, if you do end up with a “need” and no funds to pay for it, beware of the “buy now, pay later” promos.

If you’re in the market for a big ticket item like renovation materials or a major appliance and then you see an advertisement for just what you need with a headline like this: NO MONEY DOWN, NO PAYMENTS OR INTEREST FOR 12 MONTHS. It certainly may look enticing – but ‘don’t pay’ deals can end up costing you a lot more than you bargained for!

Deferred payment options are a popular promotional tool for many retailers, and an uninformed consumer can get hit with some hefty fees if the purchase item isn’t paid off within the promotional period. Even if just one cent is left unpaid after the payment due date, you will usually be charged interest on the whole amount of your original purchase. And because most ‘don’t pay’ deals are financed through financial institutions, they usually involve accepting a retail credit card with annual interest rates often in the 20 to 30% range.

Here is an example of a ‘don’t pay’ deal that looks good until you read the small print.

Promotion:

• No interest if paid in full within six months
• Minimum $299 purchase
  No annual fee, merchant fee or administration fee

Small print:

• Annual interest rate of 28.8%
• Interest accrues from purchase date and is waived if each minimum monthly payment is made by due date and the purchase price is paid in full by the plan expiration date
• If no payments are made or the balance is not paid by the expiration date, interest will be charged at 28.8% per annum.

It pays to look very carefully into ‘don’t pay’ deals before you sign on the dotted line!

Another common debt-trap is credit cards.  They’re generally easy to obtain, and convenient.  They can also put you in a world of financial hurt, especially when you run up big debt on high-interest-rate cards. You don’t plan to do that, of course, but it can happen almost before you know it, especially if you make only the minimum monthly payment.

The minimum payment on credit cards is determined either by a percentage of your outstanding balance (usually 2-3%) or a small monthly fee (usually around $10). These are relatively small amounts but if you only pay the monthly minimum, it will take years to pay off your credit card balance.

Let’s say you have an outstanding credit card balance of $2,000 with an interest rate of 19.99% and a minimum payment requirement of 3% of the balance. Your initial monthly minimum payment would be $60 and if you make only the minimum payment every month, it would take you 15 years and 3 months to pay off your balance in full and you would end up paying $2,238 in interest That’s more in interest alone than your original balance – so it’s easy to see that increasing the minimum monthly payment by even a small amount can drastically reduce the length of time it will take you to pay off a credit card balance and the amount of interest you will pay.

Sure, it’s difficult to think about a distant future plan (something intangible that is way down the road) when it so convenient to get something you want today.  This is why so many people fail to set realistic goals, and don’t focus much time on their future financial goals, until it’s too late!  With the right strategies, like debt consolidation & debt swapping, you can manage your debt, and you can achieve all your financial objectives. A good place to start is by talking with your professional advisor.

Lynn MacNeil, F.PL. is a local licensed Financial Planner with Investors Group Financial Services Inc., with over 19 years experience working with retirees & pre-retirees. This column is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide legal advice.  For a private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at (514) 693-3384 or [email protected]