The Danger of 12 Months No Interest Financing for Appliances

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When we decided to start a kitchen remodel, we knew we would finance our appliances in some capacity.

We could make up many reasons why that was the case, but the simple answer was that the appliances we wanted were expensive (read: ~$25,000 in total) and we didn't want to blow through our cash savings to buy these outright.

So when it came to looking into financing, we considered the spread of options be it putting them on a credit card, taking out a home equity line of credit (HELOC), and 12-month, no-interest financing from the sellers.

Ultimately we went with the zero-interest financing from the retailers because 0% interest sounded pretty good to us. But this comes with one big caveat that is often not discussed but really needs to be addressed- that “12-month term” is disingenuous at best!

  • Note: We are not financial planners. This article is more about conveying our experience in taking 12 months same as cash financing and is purely anecdotal. Your mileage may vary. When in doubt talk to a financial planner before making any major purchase decisions. 

What is 12 Months No Interest Financing? 

12 Month No Interest Financing is a Credit Card

“12 Months No Interest Financing”, also sometimes called “12 Months Same as Cash”, is a novel way for companies to sell high-value products without requiring 100% payment upfront.

When in the store, you fill out a quick application with a partner bank, and if approved, you pay back the principal in the form of a loan. If the loan is paid off within a year, you get away with no interest (hence the “same as cash” slogan that is often used).

As we technically had all of the money necessary to pay off our appliances in their entirety (but just didn't want to), the no-interest financing option made sense for us here to just be a bit more flexible with our funds. We could pay down our balance over time, pay it off before the year is over, and enjoy our purchase without any extra fees or headaches.

But what if you can't? You may be on the hook for a lot of money!

The Hidden Gotcha of 12 Months Same as Cash

The devil is in the details with many things involving personal finance, and loans like these are no different.

With conventional financing, you are charged interest on the balance of your loan. So if you are charged an APR of 5%, it is often averaged out over the payment period (say, once a month) such that over the course of the year that balance would be charged 5%. This is the typical setup for conventional financing with a mortgage, car payment, etc. Many of these loans are often designed so the monthly payment is fixed over the term, too.

But appliance financing is essentially set up like a credit card (we even got store cards mailed to us!) and has three big catches:

First, appliance financing trends towards credit card interest rates, and both of ours were listed somewhere between 28-30% APR. Ouch.

Second, the minimum payment due each month is directly proportional to the balance. So at our ~$25,000 loan required a minimum of $800/month payments every month. As we paid down the balance every month, the minimum due decreased, too. 

Third, if you don't pay off your loan entirely within the first year, you are charged the entirety of that APR applied retroactively to the starting balance.

Yes, you read that right. 28-30% interest on the starting value, which for our purchase would've been a nearly $7,500 hit whether we had a $5 balance or a $5,000 balance. Double ouch.

Now, you may be thinking, shouldn't they charge that interest only on the remaining balance moving forward? Yes, in a perfect world that would be the case. But these loans are also somewhat predatory in nature in their hopes that you get behind on payments, don't realize you need to be paying far more than the minimum required (ours would've been roughly 2.5x monthly minimums to pay off in 12 months), and ultimately get hit with this retroactive fee all the same.

To put it bluntly, the reason you are enjoying 0% in the first year is simply that so many others mess up. The bank will always win with deals like these, so if you aren't paying for it, someone else always is. We just don't want you to be that person.

Ways to Avoid Getting Hit With This Fee

Thankfully, there are a few things you may want to consider to help ensure you aren't hit with this kind of fee when buying appliances with financing.

First, and perhaps easiest, is simply to not make any purchases on financing without having that cash on hand to begin with. This is what we did, and we simply financed as a means to not deplete our savings upfront when doing our kitchen renovation in the event non-financeable items went up in price (i.e. contract labor, raw materials, etc.). After paying more immediate bills, you can simply move that cash over to pay down the loan before the term is over.

Second, pay off your highest-value loan first if you have more than one. If you are at risk of being late before the year ends, it is cheaper to pay a 30% fee on a $5,000 loan over a $20,000 one. Of course, this assumes you had more than one loan to begin with which may not always be the case (we just so happened to have two as we shopped at two separate stores).

Third, don't forget a HELOC option from your bank. These lines of credit can be borrowed against the equity you have in your house, often for a small closing fee (< $500) and modest interest rates (typically around what current home financing rates are). While it could take some time to process the paperwork to receive cash on hand, if I was significantly behind on my payments I'd rather pay a ~$500 origination fee and 6% APR on a $5,000 balance over having to pay a retroactive 30% on $25,000.

  • NoteWe do not like the idea of borrowing against equity in a house as that becomes a slippery slope. We always try to avoid interest outside of our base mortgage whenever possible. This is only referenced because it can be used in an emergency to restructure your debt into, hopefully, something a bit more manageable.

Finally, don't wait until the last month to start paying extra on your loan. Even if you have the cash on hand to pay it all off at the start, situations can change with any given “what-if”. As mentioned above, our $25,000 loan had an $800/month minimum due but would've required closer to $2,100/month if we wanted to pay off the entire balance equally over a year. If you only pay the minimum, you'll still owe over $16,000 in the last month to avoid the interest, whereas paying $2,100/month would have you at a $1,900 balance for the final payment.

We'll let you decide which one would be easier to deal with if you suddenly became in a bind!

Overall, while we had no issue taking out a 12-month same as cash loan to buy kitchen appliances, we thought the terms for these were pretty insane. While our appliance stores were very clear about what we were getting ourselves into, we could also see other spots not being so transparent, too.

As such, if you aren't prepared to pay your equipment off on day one, you may want to go into this one with significant reservations. The fees can be truly outrageous if you mess up!

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