Don't Pay for One Year
Years ago I was buying a piece of furniture and was offered a "don't pay for one year" deal. I innocently asked whether I could get a discount if I paid right away. The answer was a firm no and my attempts to continue negotiating failed to lower the price. It wasn't until years later that I learned why.
If you fail to pay the full amount on time, you get hit with high retroactive interest back to your purchase date. If enough people fail to pay on time, the zero interest for a year deal can actually be profitable for the finance company.
To make things a little more concrete, I looked up a major retailer's don't pay for a year deal. At this store, if you pay on time, there is no interest and no extra fees of any kind for a year. If you are short one penny when the year is up, you pay 12 months of 2.4% interest (32.9% for the year after compounding) on the entire purchase.
If the retailer just offered regular financing, let's say that the interest rate would have to be 8% per year to cover the retailer's overhead plus the expected default rate. This is only about one-quarter of the 32.9% rate that you would have to pay if you get hit with retroactive interest in the don't pay for a year deal. So if more than about one-quarter of people are unable to pay after a year, the financing deal is profitable on its own.
Another possible concern for the retailer is that offering a discount in lieu of the zero percent financing deal undermines the advertising claim that the financing is really at zero percent. However, car companies seem able to walk this line without difficulty.
If you fail to pay the full amount on time, you get hit with high retroactive interest back to your purchase date. If enough people fail to pay on time, the zero interest for a year deal can actually be profitable for the finance company.
To make things a little more concrete, I looked up a major retailer's don't pay for a year deal. At this store, if you pay on time, there is no interest and no extra fees of any kind for a year. If you are short one penny when the year is up, you pay 12 months of 2.4% interest (32.9% for the year after compounding) on the entire purchase.
If the retailer just offered regular financing, let's say that the interest rate would have to be 8% per year to cover the retailer's overhead plus the expected default rate. This is only about one-quarter of the 32.9% rate that you would have to pay if you get hit with retroactive interest in the don't pay for a year deal. So if more than about one-quarter of people are unable to pay after a year, the financing deal is profitable on its own.
Another possible concern for the retailer is that offering a discount in lieu of the zero percent financing deal undermines the advertising claim that the financing is really at zero percent. However, car companies seem able to walk this line without difficulty.
Some retailers will accept negotiating better if you do offer to pay right away.
ReplyDeleteI remember when I bought my son's furniture for his room ($2500) I got the price down for saying I'll pay for it all 'right then and there'. Then when it came to pay I took out my mastercard and the guy tried to argue with me but I said look, I'm ready, willing and able to pay right now. Let me. And he did!
I knew someone who used to work in the collections department for one of these chains. She hated the job as it was basically call after call to people who didn't pay on time and were now paying huge interest payments. Or she'd get calls wondering why they were still being charged and she had to explain that they'd so far only paid the interest off.
ReplyDeleteSo yah, they're definitely profitable for the companies. Probably the only reason it isn't a year-round "deal" is to create the illusion that it IS a deal.
Great topic.
ReplyDeleteI see people all around me at work that fall for that "Dont pay for... " line.
With any larger ticket items i negotiate a discount. I have sucessfully done that with :
New roof
Hot Tub
Gym Membership (50% for me and a friend)
It simply took a reasonable sounding e-mail written very politely stating my reasons why I felt a discount was warranted.
People are reasonable and will help you if they can.
I knew somebody who did this and when I tried to point out that she doesn't know how her life might be in one year, she retorted that she doesn't intend to pay but have the debt + 26% interest stretched on a monthly payment. I heard also a story of somebody who had something like 7300.80$ to pay, paid the round 7300$ by the date but was still left with the interest to pay, hundreds of dollars for that 80c unpaid, as the fine print states clearly that the sum should be paid in full - with the "full" word to be taken 100% literally. Something else that ticked me off was that the 0% interest was supplemented by "administration fees" - sometimes as high as 70-80%. So if one finances 800$ - a camcorder, let's say - they still pay 10% interest on it via these "admin fees". I always make sure I have all the story before making such a purchase and even then, I have ample room to pay and do it gradually through that year.
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