As a result of my career as a personal finance educator, I do not live beyond my means. Like most, there are things that I “want” and I perform the mental gymnastics to determine if I truly “need” the object in question. The other day I received a new catalog from a company whose service mark makes the claim of “making luxury affordable.” The cover informed me I was “pre-approved” and that I would pay no interest for 18 months. So, I curiously perused the catalog just too see what indulgences were afforded to me.
First, I reviewed the interest rates and promotional periods described on the cover. The information was clear; however, the rate I “qualified” for was not easily discernable. There were three rates quoted for APR information in the following order – APR 3 14.24%, APR 2 19.00% and APR 1 22.98%. The penalty APR was listed as 28.99%. As is customary as of late, the interest rate was variable; therefore, the potential for adjusting each month existed. I then moved to the interest free period mentioned. Purchases over $1,999 qualified for the full period of 18 months, while lower purchases qualified for a substantially shorter period.
Now, understanding my finance options, I turned to the products. The selection was impressive and the monthly payments were more than reasonable and clearly marked. However, I wanted to see how the overall prices listed (in VERY small print) stacked up. In the interest of fairness, I compared apples to apple; however, I will highlight the best prices my Google searches revealed. First, I reviewed a popular laptop from HP which was listed for $999 with a monthly payment of $30. My search found several sellers offering the same product for $667 – a difference of $332. Wow. The second item was a home entertainment system from Bose which was listed for $1,099 with a monthly payment of $33. The price was not too far off from online retailer’s average cost of $999; however, that $100 could do wonders in my savings account. Lastly, I researched a popular Dyson vacuum cleaner. In this case, the catalog was dead on at $499 – monthly payment of $15.
Ok, now time to bring all of these aspects together. More than likely, I will be assigned the 22.98% interest rate — just a hunch. If I were to purchase the vacuum cleaner for $499, I would only qualify for 6 months interest free period. Factoring that in, and paying $15 a month, I would spend approximately $660 over 48 months to own the product.
Shopping in catalogs may be enticing; however, you need to understand all the terms and conditions, as well as comparison shop. As indicted here, not all products are competitively priced. Furthermore, being wooed by a low monthly payment can cost you big. The true cost of your purchase is the selling price plus interest. This is true for anything you purchase on credit. It is always best to perform two separate analysis for any item you are considering. First, determine if you really “need” the item, and then how much it will cost you in the long run if you finance it. For assistance in determining the actual cost of items purchased on credit, please visit GoodPayer.com for some helpful calculators.
For more information, or to speak with a certified credit counselor please contact Cambridge Credit Counseling at 800-897-2200 or www.cambridgecredit.org.