Financing Appliances: Is It a Good Deal? Pros and Cons

I know what you’re thinking.

You’re considering financing that $15,000 kitchen appliance package with no payments for a year.

Instead of paying upfront, you’ll channel your inner Dave Ramsey or Suze Orman (or your favorite financial planner) and invest in that Nvidia stock you’ve been eyeing for the past year.

Hold on.

You need to understand more before making that decision. There are safer alternatives without the risk.

In this article, you’ll learn the pros and cons of consumer financing, plus all the problems they don’t tell you about at your local appliance store.

Then, I’ll share one of the worst blunders in my career regarding financing.

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Consumer Financing: The Bank Definition

Here’s a direct quote from our bank about consumer financing:

"The most popular consumer financing offers in the market today are Deferred or No Interest if paid in full. These programs accrue interest for the period, but so long as they are paid off by the end of the term, you will not be paying interest."

Keep that "so long as they are paid off" part in mind.

I will remind you throughout the article.

Consumer Financing 1986-Present

I remember, back when I started in 1986, an elderly gentleman wanted to buy a refrigerator and pay $5 a week. (Now, I am that elderly gentleman.)

I felt bad because I had no idea what I was talking about.

So, I did some research and then brought in a company for financing called Avco.

I remember filling out the forms, calculating the interest, and then waiting days for approval.

Now everything is done in minutes.

However, we really started financing with GE Credit.

It was there where I blundered huge.

We designed this Christmas in July promotion and sold way more than expected.

Our rep was thrilled.

I never forgot his name: Bob Evelyn. Great guy.

I was saying people really loved not having to pay until the end of the year.

He said it was supposed to be payments with no interest.

Oops.

But they covered the mistake, and that became the standard promotion.

You financed the whole amount and would accrue no interest if paid by the end.

Flash forward to 2007-2008.

This type of no-payment deal was part of the problem, as people defaulted based on plummeting home values.

Today, every interest deal is based on minimum payments.

So that $15,000-dollar kitchen is $1,250 a month.

But even with interest, you will have problems if you do not know the facts beforehand.

Financing Appliances at a Glance:

Pros

Interest-Free Period:

• Cost Savings: With no interest for a set period, you can spread out payments without incurring additional costs, making large purchases more manageable.

Credit Score Improvement:

• On-Time Payments: Successfully managing a financing plan can positively impact your credit score by demonstrating responsible credit use and timely payments.

Opportunity for Interest Earnings:

• Investment Potential: Instead of paying a lump sum upfront, you can invest your money in higher-yield options like CDs (Certificates of Deposit) or money market accounts, earning interest. In contrast, you pay off your financed purchase.

Cons

Credit Score Risks:

• Your credit score takes a temporary hit and then improves when paid off.

Severe Costs of Financing:

• Up to 31.49% (more about that later).

Application Time:

• You have to spend a few minutes filling out the application.

Con Number One: Credit Dips

First, your credit score dips a bit whenever you apply for an alternate line of credit.

According to our banker (who edited this, by the way), that drop will not affect you from a loan perspective unless the amount is too large for anything else for which you need credit.

That said, your score will increase once you pay off the account.

However, your credit score will drop considerably if you don't pay it on time or miss a payment.

That's a huge problem, but not your largest one.

Con Number Two: Deferred Interest

Let's say you missed that payment or didn't pay it off by the end of the promotional period.

No problem, right?

Wrong.

The lending institution can/will charge you back to dollar one.

That interest rate now averages around 29-31.49%.

The once omnipotent, venerable Sears card is now over 30%.

Home Depot vs. Lowes vs. Best Buy

• Home Depot: 17.99-29.99%
• Lowes: 31.99%
• Best Buy: Prime rate plus 21.99%, ranging from 15.99-31.49%

Citibank backs Best Buy and many other retailers.

The other half of retailers, including Yale, use TD Bank at 29.99%.

So that $15,000 kitchen is now $18,000+ or up to $19,500 or more, depending on when you stop.

And that's a problem.

The best way to play this game is to use their money and never finance beyond the terms.

Ever.

Financing vs. Credit Cards

Credit cards are easier.

You just whip it out of your wallet and complete the transaction.

You even get points.

Unfortunately, those points have dwindled over the years with less value.

I have the Marriott Card and charge all year for basically three free nights.

However, credit cards are not a bargain either, with rates averaging 21.49%.

0% is about 21.49% better than that.

That is if you pay on time.

Which is the central theme of this article.

Pros of Financing for Appliances

I was on a call with the company managing the company 401K.

One of the index funds in our plan was up 30% in the last 12 months, and the average fund was up 16.71% in 2023.

You can't always count on that or whatever Nvidia did last year.

But let's take something safe and predictable:

Put that $15,000 kitchen in a CD or money market fund, making 5.25% every five months.

If you pay off your $15,000 appliance order in a year, you will have earned an additional $787.

However, you must still pay $1,250 monthly before receiving that interest.

Then again, if you pay it off immediately now, you have no interest.

So, Should You Finance?

It depends.

It might be a burden to finance a house, a boat, and everything in that boat and house.

Don't finance if you tend to forget a bill occasionally.

If you forget a financing bill, you will never forget it again because the interest rates are so high.

However, if you stay disciplined, using other people's money is always a good idea, especially with guaranteed interest.

Epilogue

As I said, I had our bank, Bank of America, edit this post.

I wanted to ensure accuracy, especially regarding the credit score part.

They removed the 0% references throughout the article. However, everyone still calls it 0%.

I am OK with that correction.

They also removed the missing payment part and edited it for multiple payments.

However altruistic they may have felt that day, it doesn't align with what happens if you miss a payment.

So, don't miss a payment when financing.

Not even one.

Additional Resources

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