First Person: The Truth About 'No Interest' Financing

Even with interest rates at their lowest level in years, consumers still see offers of "no interest" on financing for purchases from computers to furniture, and from carpeting to new appliances.

While it may seem like a great deal to finance a large purchase over time and pay nothing for the convenience of doing so, many such deals come with very stringent rules that almost set you up for failure. They also come with high interest rates that are charged the instant you violate one of these rules. And the high interest rate is charged retroactively from day one, so if your last payment is late you will be hit with the full interest charge from the date of purchase, as if you financed the purchase originally with a high interest rate. The key to these contracts, as with any financial document, is to really read the fine print.

I've had personal experience with this recently as I've been looking to buy a new Mac laptop, which will probably cost me about $1,800. For a purchase like this, I would normally use an airline mileage credit card and lately I've also been using my PayPal debit card, which offers 1% cash back on purchases such as this, saving me $18 in this case. If I use the credit card, I get the mileage and then I pay the balance off in full each month, avoiding interest charges.

While shopping around for the best price on the computer, I saw a newspaper ad for Best Buy that offered "no interest" financing on purchases over $429 when paid within 18 months. This seemed like a good deal until I read the terms of the financing I would be signing for.

The first condition was you must pay the balance within the agreed 18 months, which is reasonable. The second condition is you cannot make any late payments or the deal is off and you are responsible for all the interest payments, from the purchase date, at a very high interest rate. So if any of your payments are late for any reason, you are now paying a 25.4% interest rate. The terms specifically state that "deferred interest will accrue during the No Interest period at the APR (annual percentage rate) disclosed in the terms of the finance agreement and be be as high as 29.99%."

The other fine print is that if you have any other delinquencies on your credit report, any other late payments, past due bills or any problems, on other accounts, not even this new Best Buy one, the deal is off and you must pay interest, but at the higher penalty rate. And, get this, the normal interest rate is 25.4% and the penalty rate is a staggering 29.9%. This financing is through Chase.

The same risk and dangerous terms apply to "no interest" car loans. They carry the same tight restrictions with an extremely high interest rate, a high penalty rate, and a high probability of failure.

I have good credit and the interest rate on my Visa at my credit union is 9.9%. Even my airline credit card is at 15.9%. The best thing is to use cash to pay for purchases; that's how you know you can afford it. If you must finance a purchase, consider using a credit card with a low interest rate so you can lock in a reasonable rate and work to pay the balance off early to save finance charges.

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