These 90 days* same as cash deals can be really good or really bad. Here are some tricks to keep them on the good side of things and save you money. These deferred payment deals can be very effective when used correctly. (*I say 90 days, but many of them are like 6 months or a year)
This post was inspired by a mistake made a while back by my now 25 year old son. This son, in fact. He was using a same as cash promotion and making a complete HASH of things. Yes, I know he’s a handsome fellow, but he’s not quite perfect. Like a lot of kids (okay, young adults!), he makes mistakes sometimes, especially regarding money.
His latest mistake concerned a guitar. Another guitar. He’s turning into a bit of #guitarhoarder! I think he has four or five of them. Honestly, I stopped counting a while back. I thought I saw a new one floating around in his room, but he convinced me that it was an old one. Until I saw the bill…. The past due bill. For $500. Ooops!
Sure enough, I got the story out of him. He had bought it on a 12 months same as cash deferred payment deal. He had great intentions of paying it off, but of course that never happened. The sad thing is that he was living at home with us then and had plenty of money to have paid it off during that time. Now he has an apartment and a girlfriend, so it will be much harder for him to get it paid it off.
Plus he’s accrued a whopping $50-$75 in interest fees on the darn thing as a result of not working the 12 month same as cash deal properly. Dave Ramsay calls that a Stupid Tax, which I think is a great name for it. Check out my post on Dave Ramsey’s book.
How Does a Same As Cash Program Work?
Now let’s back up and see how he could have done this better. It doesn’t matter whether it’s 90 days same as cash, six months same as cash, or one year = no interest. It’s all the same basic concept. You buy a large ticket item – like a guitar and the store very kindly allows you a waiting period with no interest charges. Usually you have to make some kind of payments, but some plans don’t require any payments with approved credit.
For most people, that seems like a very attractive deal, and it can be a terrific bargain IF you work it right. Obviously, in this case, Mama’s little darling did NOT work it right. The big “gotcha” angle they are counting on is that you won’t have 100% of the charges paid by the ending date.
When that happens, (and it nearly ALWAYS happens), they rub their greedy little hands with glee and they sock you with a whopping interest charge on the whole amount – typically 25% or more. Then they continue to charge you that huge interest charge until you get the whole balance paid off. Nice of them, isn’t it?
Now, let’s see how to legitimately “hack” the plan so that YOU come out ahead and not THEM.
Step One – Can you Actually Afford the Item?
That’s a big question because these deals cause a lot of people to get sucked into big screen TV’s and other big ticket items they really can’t afford. In this case, yes he technically could afford the new $500 guitar (although Mom didn’t think he needed it!) although he wouldn’t have been able to pay cash for it. Don’t burst your budget just because you don’t have to pay for it TODAY.
Step Two – Actually Read the Deal and Evaluate It
How long is the grace period, and how much is default interest rate? These companies aren’t in business because they love to give people free stuff. They are looking for a profit and lots of it. What exactly is the final date before the interest charges kick in? We’ll call that D-Day.
My son still won’t tell me the interest rate, but I’m suspecting it’s at least 25% or more. And even worse, I’ll guarantee that he didn’t actually know what it was when he signed on the dotted line. Most people skim over that part in their excitement to get that shiny, new thing home. The stores certainly aren’t going to tell you. The law requires that they post it in a prominently in the contract, but that’s about the only place you will see that number show up, so it’s easily overlooked.
Sidebar – I’m that crazy person who actually READS a legal contract before I sign it. Embarrasses the heck out of my family, and apparently only maybe 1 person in 10 takes the time to read stuff like that, but I’ve been burned before, so they can blush all they want. I READ IT anyway.
Step Three: Figure out Your Payment Plan in Advance
If you know the item must be fully paid for by June 1st, you need to divide the purchase price by that many months and see if that is a payment you can afford to make. In Matt’s case, that would have been $50 a month for ten months – easily affordable on his salary.
Step Four: Set up an Automatic Payment Schedule
It’s very important that you don’t miss any payments, so use your bank to set up an iron-clad payment plan so you can’t “fudge” on a short payday – well, you CAN, but you’re less likely to if it involves several steps. Keep a close eye on your statement every month so you know where you are in repayment schedule.
PRO TIP: As an extra safety precaution – set a reminder in your phone a month or so ahead of time to make sure it is fully paid off by D-Day!
Alternate Step Four:
However, if the item is a large-ticket item and you can’t afford to pay it in full by the grace period, you can employ a different strategy for step Four. You figure out how much you can afford to pay per month. You still set up the automatic payments and watch the account very closely to make sure they are being applied. But the balance won’t yet reach zero and you don’t want to pay that huge finance charge, DO YOU?
So a few weeks (not days – weeks!) before D-Day you will need to figure out where to move that remaining balance. Very important that you allow enough time for the payment to fully clear by D-Day or you’re liable for the big finance charge anyway. Which defeats the whole purpose!
Let’s say there’s $500 remaining on the balance. Here’s how to pay it back:
- Savings account – top choice, although you should pay it back as soon as you can
- Credit card – extra points if you can get a zero balance deal!
- Overdraft account on your checking account
- Worst choice – borrow from your 401K or get a payday loan – I’m going to write a post about these some day, but trust me. This is only an option if you are in a very dire situation where food, shelter, or basic transportation are at stake.
The important thing is that you have to pay off every cent of that balance BEFORE the final due date. If you are even one day late, blammo! You are going to get hit by that big fee. Think of it as a big boulder waiting to drop right on your wallet.
The best part is that when you do it like this, you get to sit back and laugh at that darn store. They gave you the free use of their money for up to a year thinking you were going to be like all those other poor saps and pay that Stupid Tax, but you outsmarted them and now you can laugh all the way to the bank!
Hey Adrian! I found your blog (using http://www.google.com/blogsearch) hoping to land on near new living-wise, money-saving posts. What do you know?! It brought me to your “Smart Money” series! Winning. I haven’t read on yet but I LOVE this article. Very well written + I could not agree more with your thought process. It’s only appropriate to think one will only benefit from “Stupid Tax” by beating the system! I wish EVERY consumer would read this whether a self proclaimed living-frugal-money-smart, responsible-credit-card-spender, or think-they-are-destine-to-get-a-money-tree consumer (haha).
Typically if the deal sounds too good to be true, it probably is too good to be true! Thanks for the post + sharing your personal life experience. And, I hope the guitar is paid off, or at least on the right track 🙂
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