I’m sure that you’re familiar with deferred payment plans. They’re a very popular sales tactic in stores that sell household furniture, white goods, and basically anything electrical. In fact, these tactics are getting pretty popular lately; you can defer payment on almost anything:
Need a student loan? Worry about it later!
Want a new car? You can defer those payments too!
How about a house? Sure, go ahead and sign up, there’s nothing to pay for a whole year!
Deferred payment plans are a dream come true for sales people and spendaholics alike, it seems like everybody wins…until the deferral period ends payments.
Oh No…
Yep, at some point, those deferred payments will have to be paid, and that’s when people end up buried in debt without even realising. If you really go to town on those deferred plans, there’s a good chance you’ll end up multiplying your problems as the deferral periods end and they compound together. And that’s when the reality of buying a brand new car sets in.
The Trap
The real trouble with deferred payment plans is that the loans you sign up for generally aren’t deferred at all. In reality, they’re compacted into a shorter loan period, which makes your repayments a lot higher than they would be if you’d just started paying from day 1. People who choose deferred payment plans are often stuck with “account keeping” fees and higher than average interest rates as well, which can add hundreds or even thousands of dollars to the loan. For many that end up in dire financial trouble, even selling the item they purchased brings little respite as the nature of most items sold this way is that they are worth far less than their original purchase price in a very short amount of time.
The Solution
Deferred payments plans are not a good way to buy the things you want. I would go as far as saying that you should stay away from them altogether, no matter how attractive the deal may seem. It is true that some people can use them to their advantage, but often it requires far more discipline than many can manage. It is far better to buy what you can afford and if you canít afford what you want, then save for it. This rule applies to pretty much everything, with almost no exceptions. Credit or store cards are not a solution, they are as bad or even worse than deferred payment plans. If you really need a loan for something important that is going to improve you ability to create wealth, like student fees, or to buy a car that matches your needs, then shop for a loan before you go shopping for your purchase. Investigate all possible options and find the right loan to match your situation, not one that is convenient. There is really no such thing as deferred payment, you are simply prolonging the inevitable. If you shop smart, you will enjoy your purchase far more in the long run.
Shaun is not an accountant, financial planner or life coach, but he writes about wealth creation anyway! Shaun’s motto is “Make wealth, not money,” which fits quite nicely with where he wants to be in life. Find out more by visiting his blog where he’ll show you how to design a wealthy life.
Deferred payment offers make sense when you already have enough in savings to pay for the item and you would like to leave the money in an instrument that’s earning some interest. When interest rates were better, I always purchased big-ticket items this way (I never buy anything unless the money is in my pocket to pay for it). Make the payment near the end of the 11th month of a 12-month deferred payment plan, and you run no risk of an finance-fee gouge.