Why a ’same as cash’ deal is NOT the same as paying with cash

Certainly you’ve seen advertisements for:

“Pay nothing until 2009!”

or

“Same as cash: no payments until 2010!”

Trusting that you understand that retailers are in business to make profit (not that there’s anything wrong with that), surely you’ve wondered why they make such wonderful opportunities available to you.

You: Because it is profitable to do so.

Indeed.

You: But how, exactly?

At least two ways. The first is that many people leave the store thinking that they won’t charged any interest even if they pay nothing for a year or more.

You: Isn’t that what “same as cash” means?

Theoretically, yes. But in practice it means that the entire payment is due by the time the grace period is over. If the entire balance is not paid by that date, interest is collected retroactively since the date of purchase.

Say you buy a $2,o00 gadget with same as cash terms – pay nothing until 2010. But in January 2010 you only have $1,500 to pay for the gadget. So you might be thinking “okay, I’ll just finance $500 from this point forward.”

WRONG! You’ll be charged interest based on the entire $2,000 since the date of purchase – that’s more than two years of interest and typically at a very high APR. A $700 interest charge (or even more) would not be out of the question!

You: Even though I only owe $500?

Yes.

You: <expletive deleted>

That’s why not paying off a same as cash financing deal would qualify as a major financial mistake. In fact, come December 2009, there will likely be no greater financial priority than assuring that this $2,000 expense is fully paid off.

Of course, you might not like making it such an enormous priority for a two-year old gadget now worth $147.38 on ebay, but alas such are the peculiarities of same as cash financing.

You: Now I see how profitable it would be for the retailer/lender.

In addition, you often have to make minimum payments every month starting the month after purchase in order to preserve the “same as cash” interest savings. Although I haven’t found a store that clearly communicates this new wrinkle, this policy gives you another monthly bill and something else you can easily forget.

You’re busy enough already. Pay for the item is at the time you buy it. If you can’t afford it then, “Don’t buy it” is the most concise and accurate advice available to you.

Want to live Beyond Paycheck to Paycheck? Major on the major.

“personal finance” “financial education”