Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 7)

Is 90 Days Really "Same as Cash"?

by

Charles Lamson

Time for a reality check. Do you honestly think businesses are primarily concerned with your well being? Of course not. Businesses are primarily concerned with making a profit. There is nothing wrong with making a profit---it is how they will stay in business. The conflict arises when businesses offer you great deals---just because they love you so much. These great deals often take the form of buy now and pay much later. A good example is the furniture business.

How many times have you seen a furniture store advertise "buy now and no payments or interest for one year"? Are you really getting an interest-free loan for a year? Of course not. You will pay interest, and quite a lot in many cases.

There are at least two ways you will pay for that year with no payments and no interest. First, when you do begin making payments, the interest rate can exceed 18 percent in some cases. The second way you will pay is  through an inflated purchase price, which has interest charges built into it.

Here is how it might work:

The store offers a sofa and chair for $1,000 retail. The storeowner paid  $500 for the items. They are offered for sale at $1,000 with no payment or interest for the first year, then 18 percent for the next three years. The owner sells you the sofa and chair on the above terms. Once you sign the contract (essentially a loan), she sells the note to a third party for $750. She pays off the wholesaler and has a gross profit of $250.

The third party holds your note and receives your payments. At the end of four years, you have paid over $1,600 for the $1,000 furniture and the third party has made an $850 profit. In addition, should you miss a payment or two you maybe liable for repaying the first year that was interest free.

Can you make these situations work to your advantage? The first alternative is somewhat unconventional, but certainly doable. If you have the money in hand to buy the furniture, offer the store $750 cash right now. You would be surprised at how many merchants will negotiate prices, especially for cash.

The second alternative is to agree to the stated terms but save up enough over the year to pay the $1,000 in full. This saves you the high interest charges. However, be very careful the contract does not have a prepayment penalty. (A prepayment penalty is a fee for paying off a debt early.)

*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 18-19*

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