Shortly after my wife and I were married, we decided we needed to replace several pieces of furniture in our apartment. Our furniture at the time was still the furniture we used during college – in other words, most of it was from the goodwill store.
So we did what many people do when they are thinking about shopping for furniture – we checked out some websites along with the fliers from the Sunday paper. One of them, for a large furniture store in the Des Moines area, advertised “six months same as cash,” which we took to believe that it meant that for the first six months of payments, there would be no interest at all.
How wrong we were.
We bought a kitchen table, several chairs, a couch, and a bedroom suite all at once on credit, totaling just south of $5,000. When the bills started to arrive in the mail, we made double payments, thinking that if we got a lot of the balance paid off now, we wouldn’t have nearly as much to pay interest on in the future. We sat back on our couch and were proud of how smart we were.
Well, then the seventh bill came and the balance on the bill was almost as high as the original cost of the furniture. Yes, after paying double minimum payments for six months, we were actually almost back where we started. We were stunned at this, but when we read through the agreement, this was exactly what we had agreed to.
Why? The phrase “six months same as cash” doesn’t mean what you might initially think it means. Here’s how it really works.
Let’s say you buy a new flat panel television for $1,500 on a twelve month same as cash plan. You realize that by paying $125 each month, you’ll have that $1,500 paid off by the end of the twelve months, so when each bill comes, you immediately pay the $125. At the end of the twelve months, you own your television free and clear.
On the other hand, let’s say you’re late for a payment somewhere in the middle. As soon as you miss a payment, not only does the debt become a high-interest one almost equivalent to a credit card (for our furniture, it was 18.9%), but they immediately assign you all of the interest you would have had on the financing in the past. In other words, with that kind of interest rate, you suddenly have an extra $106 tossed onto your balance.
The same thing happens if you don’t get the entire balance paid off by the end of the period, and quite often paying the minimum payments won’t get the job done. This is exactly what happened to us. We had a $5,000 balance that was “twelve month same as cash” and it had minimum payments of $90. So we happily paid a double payment each month ($180) and got every payment in in plenty of time. What happened? At the end of the twelve months, they dumped almost $900 in unpaid interest onto our balance because we exceeded the “same as cash” period.
Here’s what you need to do if you buy something on such a payment plan. First, don’t miss a payment, no matter what. As soon as you miss a payment, it basically becomes high interest credit card debt. Second, pay off the whole balance before the end of the “same as cash” period, even if that means you have to pay more than the minimum balance. Obviously, the best option is to just pay for the whole thing in actual cash if you can.
One more thing: some places have what they call a “debt cancellation program,” which basically says that the store gets paid in full if you die or have a very major incapacitation. It’s a ripoff for you because you’re the one that gets charged a fee on this – you are actually paying to ensure that the store gets their money no matter what. If there is any mention of a debt cancellation program, tell them you’re not interested.