I told you last week that I bought a brand new living room furniture set. It cost quite a bit of money (about $2,700) but I have some great furniture, a new TV, and actually a lot of money in my pocket.
Even though I had enough money to pay for the furniture outright, I took advantage of the 0% financing through January 2016 (after putting $500 on my credit card to get some rewards).
Instead of paying $2,700 up front, I put $500 down and took out a loan at 0% for the rest. My furniture will only cost me about $60 a month every month for the next four years.
And I won’t pay a dime of interest over all that time.
Now I Can Pay Off My Student Loans
I’m planning on paying off the last $7,000 of my student loans in a few weeks. I’ve been hoarding cash for months to do this. However, if I had spent $2,800 up front on my furniture then I wouldn’t have the money to pay off all my loans.
My new couch from RoomsToGo
Basically, GE Financing is loaning me money at 0%, which allows me to pay off my student loans at 2.38% (yes, I have a super cheap variable interest rate on my student loans).
That’s free money.
If you can get a loan at 0% and you’re certain you can adhere to the rules to keep the 0% rate (usually making all your payments on time and paying off the balance in full by a certain date), then it’s almost always best to take the loan.
Let’s pretend I didn’t have student loans to pay off.
I could have put the money in my Lending Club account, which is currently giving me a 13% return.
I could have put the money in the stock market, where who knows how much money I might have made or lost?
Heck, I could have put it in a savings account and gotten 0.50% interest, which is still a net gain considering the loan is at 0% interest.
As long as you aren’t worried about your credit score dropping a few points, and you are certain you have the money to make payments, then I always recommend getting the 0% financing.
Readers: If you were buying a $2,700 living room set and had enough money to pay it in full, would you pay it upfront or take the 0% loan?
I would only make the purchase if I had the money. With a 0% offer, I would take the $2,700, earmark it and let it earn interest. When it was time to pay it off, pay the balance and the leftover money is what you ‘earned’ for free.
Make sure you don’t have to pay a portion off every month. I thought many 0% offers included a stipulation where you had to make a payment every month. This gives you that many more chances to screw up where they’ll charge you the full interest if you do.
I agree with this statement. If they are requiring a monthly payment you might as well just give them cash so you don’t have to worry about messing up and getting stung with a interest rate hike.
It also avoids unforeseen circumstances, like a job loss. Student loans can be deferred, but this can’t.
We bought a mattress at 0% at the beginning of the year – I would never, ever pass up 0% financing. I would let the money accrue interest – you are right, it is free money!
Did you try negotiating at all? It’s not “free” money. Somebody is paying the financing costs, so it’s probably the store. You might have been able to get them to give you a cash discount that could’ve been an even better deal.
From my experience, big retailers and chain stores rarely offer cash discounts. That’s especially true for retailers that contract with 3rd party financers (like Rooms To Go and GE Credit). If you pay cash, they get all of their money immediately (along with the risk of accepting and storing cash). If you use their financing contractor, they get all of their money almost immediately (with all risk & liability assumed by the financing company). Plus, the store is likely getting a kickback or commission for using the 3rd party financer.
The unfortunate way “the system” works these days, they should probably be offering you a discount for not paying cash!
As smart consumers, we just need to figure out the best way to work “the system”.
Yeah, I guess I wasn’t aware what RoomsToGo was, because they don’t have any where I’m at. But yeah, big box retailers don’t trust their employees enough to allow them to negotiate, so they’re not given that freedom.
While it may sound like a really good deal, I don’t think I would still do this. I would probably just not buy a new furniture set, or if I had the cash I would pay it outright. There is something about making payments every month that just rubs me the wrong way. HOWEVER, I think in your case it does make a lot of sense, seeing how you are saving all that cash to make a significant debt payment. Also, you seem like the type who really is going to payments on time and in full – so that mean this free loan will actually end up being a free loan for you.
After negotiating the best deal I can, I always take the 0% financing. Though I always recommend reading the fine print very carefully. 0% loans sometimes result in huge penalties for being late, have no grace periods, have penalties for paying the loan off early, or sometimes the 0% only lasts a period of the loan and then the loan jumps up to a ridiculous rate.
Since it will take few points off from my credit score, and the return of that $2,200 is less than the sign-up bonus some credit cards are offering, if I want the money, I’ll rather open new credit cards instead.
I would take the loan. 0% loans (like my student loans :P) is free money and if you can make a return on the money there’s no downside to it.
TANSTAAFL. Somebody’s paying interest. And just in case you haven’t figured out who, you’re it.
That said, I occasionally will take the “0% interest” but only after I’ve comparison shopped. My wife is a CPA, so she religiously tracks that sort of thing. And we *never* buy anything on credit anymore unless we actually have the cash on hand. Then we set it aside in a demand account.
With two paid-for cars and no plastic-card debt at all, living is *far* easier.
$2700? I guess inflation has doubled the price of a decent living room set since I got my current one, about 15 years ago.
You have some good points. If you were set on buying new furniture, than it’s not a bad deal at all. But, did it persuade you to spend more money is the real question… because if so, than it’s not free money. P.S. the couch looks saweeet!
I love crunching numbers like this. It always reminds me to think more deeply about deals that are being offered (like, I just emptied half of an account that was earning .8% to pay off debt that had 5.9% interest– Simple math when you think about it, but I have to be reminded to think about it!).
Beyond my aversion to debt in general, I disagree with the “free money” or “same as cash” idea with 0% financing. You have to account for risk in your calculation.
You set yourself up for the potential penalties if your circumstances change during the term.
I don’t think that his circumstances will change for $2700. It’s very low risk, and not a bad idea. The bad idea comes when you look for things you don’t need with 0% financing in order to pay off other debt and play with calculators.
I think this is a great idea! Kevin obviously has the money, he has the capacity to pay. So why not defer payment, and get an interest-free loan?
The one question that popped into my head is: “Would they have sold you the furniture at a cheaper price if you paid in cash?” If the answer is yes, get the discounted furniture. But if the answer is no — and it sounds like it is — then hooray for zero-interest loans!
I would have to think about it but am 99% sure I’d take the loan in most cases. The only problem this presents is if you lose your job down the line you could run into some hard times trying to pay it back. Other than that I’d definitely take a 0% loan any day! My only thought is maybe if you paid in cash you could have gotten a better deal on the purchase.
Looks like we have similar taste. We have the same furniture! But $2700?! We only spent $1800 on it.
Zero percent for that term is nice. Did you have to pay for delivery, too?
would you take a car you like less, but was still more than fine, for 0% financing. a few years ago i chose a sienna over a honda odyssey because they had 0% for 5 years vs i think 2%.
I am interested in Lending Club, but being in Texas it doesn’t look like we get to use the full site. I tried to figure out how to lend money and it looked like I could only take over existing loans. I wasn’t sure if that was a good idea. How do you use Lending Club?
I do exactly that: take over existing loans.
It’s not convenient and I’m pissed that Texas doesn’t allow me to originate, but the nice thing is that you can make sure to only buy loans where someone already has an established track record of making payments, which I like.
It’s worth a shot, but it does take a little bit of time and research to find the right loans to buy.
I guess my thought is, why would someone want to stop lending money to someone who is making payments on time? It makes me think that they are crappy loans in some way.
You have to pay a premium for them. For example, if the APR is 15% and the person has made every payment on time, the seller would list it for a price that gives you an effective 12-13% return. They get the first payments (which have the most interest) and then unload the loan for a guaranteed 2-3% additional return and eliminate their risk.
FYI, if you do sign up, I’d love it if you used my link: http://174.37.190.189/~thousand/getLendingClub
I had looked into lending tree and was going to try it out but their prospectus states the following requirement, which I do not meet quite yet:
In states other than California and Kentucky, investors must either:
• have an annual gross income of at least $70,000 and a net worth (exclusive of home, home furnishings and
automobile) of at least $70,000; or
• have a net worth (determined with the same exclusions) of at least $250,000.
By your own admission on this site, your net worth is far less than $70,000. How do you have an account? Do they not even ask or verify this, making it more of a guideline than a requirement? I’m not trying to call you out for breaking the rules or anything here, sorry if it sounds that way. I’m genuinely curious.
I’ve had someone else mention that to me as well.
You are correct that I don’t meet the requirements yet (although I’m not too far off $70k in net worth).
When I signed up, I honestly didn’t read that stuff as closely as I should have and never even noticed it. Either it has changed since I signed up or I missed it.
All I know is they made no attempt to validate my income or net worth when I signed up, which again may have changed.
Nice page indeed! Glad that you shared this.
I have mixed feelings about this. My student loans are at 0% currently and we are keeping them even though we have the money to pay them off. However, I don’t think I would take out any more money even at 0%.
I have a hard time imagining shelling out $2700 for furniture, though! I’m sure it will happen in the future after we get real jobs as that’s what new furniture costs, but for now my whole furniture world is Craigslist.
I agree with 20’s Finances, here. If it persuaded you to purchase this set, you probably could have found a better deal elsewhere and saved even more. Also, 0% is great, but what about depreciation. Furniture doesn’t matter too much, but cars can definitely get you in trouble. You finance a “new” car and the value drops 70% in 5 years. I don’t think that’s “free money”.
But I never buy new stuff, and you have the money to, so I guess it works. I just wouldn’t encourage it on more expensive stuff that loses value quickly.
Nice couch, BTW…