When 0% Interest Looks More Like 44%
September 14, 2015I happened to overhear the following conversation while visiting my local coffee shop the other day:
“Hey, nice laptop. Where did you get it?”
“We have this program at work where we can buy computers, electronics, furniture, appliances, and other stuff and pay for it with monthly deductions from our paychecks. This laptop will be paid for in 12 months, and I never had to use my credit card or pay any interest.”
Buy now and pay interest-free over 12 months with convenient payroll deductions? Sounds like a great way to buy, right?
Maybe. Maybe not.
The issue
Often touted as “employee purchase plans” or similar programs, companies engaged in this business can make it sound as if this is a great alternative to credit cards or personal loans to purchase items such as computers, household appliances and more – until you take a closer look at the total cost of the purchases you make under these programs. Granted, there are employee product purchase plans that allow employees to buy products at a significant discount. But too often, those who cannot obtain credit or who aren’t willing to save up cash for a purchase, buy these items at greatly inflated prices when less costly alternatives may be available.
An example
A popular employee purchase program offers a 40” named-brand LED television for $849.99 or “only” $70.83 per month over 12 months — all conveniently deducted from one’s paycheck, of course. There will also be additional charges for shipping and taxes, according to information buried in the fine print.
On the other hand, this same item can be purchased from a large online retailer (whose name is similar to a very large river in South America) for only $479! This is a savings of $371 or a whopping 44%. Of course, for someone who doesn’t have $479.00, that monthly payment of $70.83 can look pretty attractive. However, even for consumers who have poor credit or no credit, some creative thinking can help them find less expensive options for making these purchases.
Exploring the alternatives
For instance, there is Mom’s well worn and time-tested advice: save up for it and then buy it, particularly if the item is not something you absolutely must have to support your career or education. Using the earlier example of the monthly payments at $70.83, if we instead saved $70.83 in a savings account, it would take a little less than seven months to accumulate the much less expensive $479 purchase price offered by the online retailer. And if we kept saving $70 each month, we could use that money to build or improve our emergency fund, save up for a future vacation, pay off some credit cards, contribute to an IRA, etc.
But what if the item you want to buy is something you absolutely need right now? For example, my fellow java junkie at the coffee shop may have needed that laptop for some college courses she was taking in order to improve her career prospects. In that case, waiting seven months or more to save up for the purchase may not be practical.
When you can’t wait
Some other alternatives she could have considered instead of the expensive payroll purchase plan include borrowing from family members (a bit awkward at Thanksgiving), or she could consider borrowing some money from her 401(k) plan at work. There are pros and cons to borrowing against an employer’s retirement plan, of course, such as missing out on future investment growth or taxes and penalties if the loan is not paid back on time so we certainly do not want to use 401(k) loans as ATMs for frivolous purchases. But for overcoming occasional and relatively small financial tight spots, a 401(k) loan that you borrow from yourself and pay back over time may be a practical solution.
Better still, when you need or want to buy some new things, why not sell some old stuff you no longer use or like? An old fashioned yard sale still does the trick and modern technology can also help us quickly turn household items, collectibles, or heirlooms into quick cash. Social media sites are popular options for advertising your sale items, and there are well known websites such as ebay.com and craigslist.com you can use.
While you are busy thinning the herd and selling off excess possessions, this is a good time to also review your personal spending plan and see where some additional trimming can be done. In my case, cutting back on the weekly trips to the coffee shop can save me a tidy sum, though I may miss out on some interesting conversations.
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