“Buy now and pay later!”

“Purchase with no money down and no payments for 12 months!”

“Take it home today and don’t pay for 6 months!”

There are different pitches, but they all say the same thing.  Buy something (usually furniture or electronics) and don’t pay for what seems to be a long time.  If you’re short on cash and feel the desire to buy something (regardless of if you need it or not) then you can be tempted to fall into one of these “traps”.  Are they a trap?  If you’re nor careful, they most certainly are.

Why are these types of promotion a trap?

For myself, I view these types of promotions as preying on the financially challenged.  Those individuals who are short on cash or even those “bargain hunters” who think they found a goldmine can easily be caught off guard.  Let me start with the most obvious issue: hidden fees.

Hidden Fees

Did you know that most companies have “enrolment fees”, “processing fees” or some other type of fee that you are expected to pay before you finish?  Did you know that the Competition Bureau in Canada is investigating two major furniture chains because of these fees?  The way it plays out is that the individual who wants to buy something goes to a room with the sales rep, they start the paperwork and then they are told well into the process that there are some “fees” that they must pay now in order to complete their application.  So how is this no money down?

Technically these “fees” are not related to the product, but rather the “application” so nobody has broken any advertising laws.  Yet the way they spring these fees on people is a little questionable.  They wait until the individual is well into the paperwork before they let them know, making people hesitant to give up on their purchase given how much time they’ve invested in the process thus far.  Dirty tactics as far as I’m concerned, and it seems the Competition Bureau of Canada agrees.

Massive Interest

Did you know that most department store credit cards carry between a 22-30% interest rate?  Did you know that when you use these cards for the “buy now, pay later” promotions that you are not reminded of your payments until the payment date passes?  Did you know that once the payment date passes, you are retroactively charged for all interest incurred during the “no interest” period?

It’s this last point that catches most people off guard.  Let’s say that you bought a table for $500, paying the $75 fee for your “application” and have an interest rate of 25%.  You are told that you don’t have to pay for 12 months.  12 months plus a week later, you check your statement on your card and see that you have to pay the $500 PLUS an additional $125 in interest!  Welcome to the other trap of these promotions.

Strategies for Avoiding The Trap

The most obvious one is to not participate in these promotions at all.  As I covered in Growing The Money Tree, creating a budget can help you avoid the need of using these types of promotions.  Have an “emergency spending” category that you save up.  I would recommend trying to get at least $2,000 in this category.  This is helpful if an emergency does come up, like a broken fridge or stove.

Perhaps you want to remodel your bedroom, so the need isn’t urgent as it’s more of a “want” than a “need”.  You could create a budget category for the remodelling, saving up each month.  If a good deal comes up and you can deal with the fees, then you could participate and then pay off the purchase each month with what you have budgeted for the expense each month.  That way even if you do miss the payment date, you are paying interest on only a small amount.

Finally if you do decide to participate in these “buy now, pay later” promotions, make sure you pay off the entire amount at least 2-3 weeks before the final date as stated in your contract.  This way you account for any “payment delays” between your bank and the company you have the contract with.  Remember, even being late by one day will cause the interest to be applied, so don’t take the chance.

Overall it would be better to avoid these promotions altogether.  Save up for what you need and try not to be tempted by what you want unless you have the money to pay for it right away.  This is the safest path and the most rewarding, especially when growing a money tree.  Happy growing.