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May 03, 2006
A Word about Store Credit Cards and Financing
Sometimes when people think they won't qualify for a bank loan, they decide to take advantage of store financing. Sometimes store financing looks so attractive, it seems like the best deal going. You've seen those ads that say, "Pay nothing down and make no payments till..." Well, here's what happens if you can't pay off your purchase on time.
Sometimes the store where you bought the item has its own credit financing. When it does, the interest paid is often tied to the store's credit card rate. That means you'll be charged the same rate as you would have been if you'd put the purchase on your credit card. While in October 1992, financial institutions were charging between eight and 10.5 percent annually for a loan, a store credit card was charging 2.4 percent a month, or 28 percent annually. That's a big difference.
Sometimes the store where you bought an item does the financing through a third party. This company takes over your debt, you make your payments directly to them and they charge you a financing cost. One company surveyed was charging 2.233 percent a month in October 1992. That's 26.79 percent a year.
It's all in the paperwork you sign when you buy the item. Make sure you read it carefully before you sign on the dotted line. The last thing you need is to find out, too late, that the financing you agreed to will cost more than you thought.
At that point you might think that all you have to do is get a bank loan to pay off the furniture. It may not be as easy, or as inexpensive, as you think. Often financial institutions tie the money they lend to the purpose of the loan. If you want a loan to pay off a furniture purchase, the financial institution may charge you its credit card rate of interest. (In October 1992, that was about 17 percent.) Why? Simple. They don't want you to use a loan for a purchase you could make on your credit card. They don't want the hassle of going through all the paperwork and procedures for what they consider to be a small loan. Instead, they would rather you used your credit card. So they charge you the same rate of interest to dissuade you from using their loans to finance such small purchases.
Not all financial institutions make their decisions strictly on the basis of purpose. Shop around. There are companies that base their decisions on you, your credit history, and your worth to them as customer. Find a lender who treats you like a person and recognizes your individual needs. Then give him your business. Remember, you're the customer. You have rights, and one is the right not to pay outrageously high interest. Shop around. Be discriminating. Make your decision based on the following:
Is it the best deal going?
Is the price negotiable?
Does this lender deserve my business?
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