Personal Finance

Free credit no payments for 6 months and other less than favorable options

Anytime any of us have received a loan or applied for in house credit we are undoubtedly confronted with some choices to make and things to think about. Generally speaking, a lending agent will work with you to ensure that you get the money or credit that you are seeking, but are not looking out for your best interests. How do you know what is good for you and what is good for the lender?

The simple answer is to be aware of everything going on around you. Many times something will seem like a good idea but really ends up costing you more in the long run, which is good for the lender. To explain further lets look at a few common areas of trouble, no payments for a period of time and insurance options.

The no payments and no interest for a period of time is a common advertising trick used to get people to purchase things that they might not have purchased otherwise. Once you are approved you will receive the credit needed to purchase what ever it is that you are interested in, however, if the credit is not repaid in full then you now owe interest on the entire amount back dated to the time of the purchase. On a purchase or $1500 at 9.0%, fairly low for in house credit cards, you will add an extra $45.11 to the total owed if the balance is not paid in full. This extra $45 ads about $2.00 to your monthly payment on a three year term. While it isn’t much more money to pay on a small amount, it is all profit for the lender.

Another common area to add to the profit of lending money is with optional insurance. Optional insurance can be life insurance, lay off protection or an extended service plan. While these are all good ideas they are not something that you should purchase from the lender for any reason. When it comes to things like life insurance for a loan, any insurance company will be able to provide you a better product at a much lower cost than a lender ever will. Lay off insurance can be an excellent idea but you must very carefully read the fine print on your contract. Often perks like this are almost impossible to collect on or may require very specific things to happen in order for you to be eligible. Undoubtedly you do not wish to be paying any extra money for a service that you may never be able to use.

In the electronics field extended service plans are cash cows hence the reason they are so aggressively pushed on each sale. Again the fine print and industry facts need to be considered. Generally speaking the manufacturer or seller of your product will repair or replace your defective goods with their own in house warranties. Also keep in mind that only about 8% of all electronics products fail with in the first year of use and of the remaining 92% only 15% ever fail in their life times. With the odds of failure so low you must ask yourself if any extended service plan is worth purchasing.

Of course many plans replace the product regardless of how it got damaged. The fine print shows that the product will be pro-rated for the purposes of replacement value and the amount of the rate is not disclosed. Insurance companies generally depreciate anything electronic by at least 20% per year and it is safe to assume the Warranty Company will too. This means that if you want your $1000 TV that is 2 years old to be replaced you will have to pay at least $400 and if you consider that you are paying an average of $20 a month for the service plan you can add an extra $240. You will have paid about $640 to have your warranted $1000 TV replaced, not nearly as good of a deal as offered.

As you can see there are many little things that often get added to a loan or line of credit that greatly increase the profits for the lender, and not the value for you. While any lender has the right to make a profit, you certainly do not want to be paying more money than you should for anything. The key to saving a lot of money when financing purchases is to be aware of the fine print in the contracts, make sure you know the real cost of the service and the actual value of the service if needed and shop around for any service.