4.2.6 Case study: Deferred payment plan

From: Financial Consumer Agency of Canada

Noriko and Tomo think a bedroom suite is too expensive while a sales agent offers financing with no payment in the first year.

Noriko and Tomo were looking for a new bedroom suite, and found a set they liked for $5,000. "We don't have that kind of cash," Noriko said in a low voice.

The salesperson overheard. "No worries," he said. "We have a great deal on right now. Zero down for the first year."

"We don't have to pay anything up front?" Tomo said.

"That's right," the salesperson said. Hardly able to believe their luck, Noriko and Tomo signed the paperwork to finance the suite for three years: no payments for the first year and then monthly payments for the next two years.

All went well for the first year. At the beginning of the second year, the first monthly invoice arrived. "$242.53!" Tomo said.

Noriko looked over his shoulder. "Fifteen percent interest," she said in a shaky voice.

Of course, Noriko and Tomo had seen the interest rate when they signed the financing agreement. It just hadn't sunk in at the time. Now it was sinking in fast—and so were their hearts. Suddenly the bedroom suite looked a lot more expensive—and a lot less of a great deal.

Lessons Noriko and Tomo learned:

  • It's important to read the fine print. Offers of "zero down" or "0% interest" for the initial period are usually followed by high interest rates and high payments for the following period. You should know what the total cost will be, including interest, over the term of the loan.
  • Other options may be preferable to a deferred payment plan. In this case, a personal loan at six percent would have been a better deal than the furniture store offer.
  • Some agreements allow you to prepay the loan in the first year. If so, that is a good strategy.
  • It is important to start planning and budgeting for the repayments as soon as you agree to a "zero down" or "0% interest" offer.
  • There may be a rebate or discount if you don't use the "zero down" or "0% interest" credit offer, for example, if you pay the whole amount immediately.
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