Thursday, January 3, 2013

Free Financing Is Not Free

I am sure that many people realize that "Free Financing" is not free, but I also know that many people don't realize it.  I am a math teacher by day and it upsets me that a finance curriculum is not required by my state.  I do a finance unit in 6th grade late in the year when the state tests are over, but only because I think it is important enough to fit it in above and beyond required course work.   No wonder America is in the financial state that it is. 
Back to the title of this post.  I wonder what percentage of the population realizes that free financing isn't free.   We bought a new couch and loveseat over Christmas break.  We could get free financing for 2 years if we didn't have the cash.  It would not add anything beyond the sale price.  How lucky for us.  If that really was the case we would be foolish not to finance and keep our money in the bank earning interest for the said 2 years. 
We did spend a good bit.  We have been saving and waiting for new furniture.  We wanted built in recliners which makes the price for each piece jump a good bit.  We also waited longer that we should have to purchase because it is a lot of money.  The couch was $1099 and the loveseat was $999.  It would cost $2098 plus $125.88 (6% tax) for a total of $2223.88.  If we put that money in the bank at 1% interest compounded annually (sad) we would have $2268.58.  At the end of 2 years we could pay off the $2223.88 and have left the $44.70 that we earned.  Free money, lucky us.  Of course I am sure any financial bloggers that might see this post would know what I am going to say next.  We were given a 10% discount for cash when they knew we didn't need to finance (standard practice for this store).  We not only save $209.80 right off the bat, but also the 6% sales tax on that amount. 
It ended up going down like this...
$2098 - $209.80 (discount) = $1888.20 x .06 (sales tax) = $113.29
$1888.20 + $113.29 tax = $2001.49 total price

$2223.88 (final price if financed) - $2001.49 = $222.39 saved over free financing

HMMMMMMMMMM........This ended up getting even more interesting.  I asked the lady how the process worked out of curiosity.  Turns out all the prices in the store are based on the fact that you might finance.  10% off is the price they really want to charge because they are assessed a 10% fee by the financing company if a customer goes that route.  Turns out, I didn't have to pay cash, I just had to not finance to get the 10% off.  I ended up using my upromise cc for which I earned 1% for my kids college fund.  I then went online and paid it off before I was even sent a statement.  Therefore, I had no interest charged on the cc.

Did you ever notice new cars often run a special like $2000 off or 0% financing?  The same theory applies.  If you choose 0% financing you don't get the $1500 or $2500 rebate that is advertised for the sale (or get offered a smaller rebate).  Losing the rebate $ is the premium price you pay for 0% interest.

All these little tricks are so enticing to someone who doesn't have the cash in hand and that's how people end up getting into trouble.  Before you might judge me for the amount I spent on furniture please know that we are at the point in our lives where we can do it and are able to afford it.  We have always been frugal. 

Caveat Emptor - Buyer Beware!!

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