A family member recently advised me that I should buy a washer and dryer on a “Pay Later” plan. She claimed that it would be a very smart thing to do as I can put the equivalent amount of cash, which I have available in the bank, into a savings account or an investment vehicle. Although on paper a Pay Later at 0% interest plan may seem smart, it is not a good idea in the real world especially if the debt is small. At the time I just smiled and nodded as she is not financially successful and I don’t take financial advice from someone who doesn’t have a successful portfolio to show for.
Negligible earnings not worth the hassle
Let’s say that I was going to take up one of these Don’t Pay Now, Pay Later deals. My total budget for a new washer and dryer is $1500 for a well rated, high efficiency washer and dryer which includes tax and delivery fee. My opportunity investment for a short term debt is a savings account that gives me a 1.35% interest. This means that if I was to invest this $1500, I would get a whole big $20.25 after 1 year! My costs would possibly include 2 transaction fees to move the money into and out of the savings account and a fee to pull my credit report to ensure the debt has been cleared after repayment. This easily erases any financial gains.
For the record, I did look online for a used HE washer and dryer. The pickings were slim for a reliable model and savings were slim compared to buying new.
Although no interest is charged during the first year, it is still debt that has to be repaid in the near future. If I were to have my eye out on a big purchase or had an unbudgeted expense, it would be tempting to use this “extra $1500″ cash available as it is really disguised debt.
Lack of organization
I’m only human and as much as I’m organized to handle most bills, I don’t want more on my plate. Paying off a $1500 loan in exactly one year requires organization. I would need to put this bill in my calendar a year from now and make a note of where the bill is stored in my house so that I can pay it off. In addition, I would need to wait 2-3 months and pull my credit report to ensure the debt has been repaid according to my creditors. I’m not that organized and doubt most people are.
If I were to fill out the credit application, more of my personal information is available for identity fraud. In addition, my payment might get lost in the mail or there may be an online transaction error. If I spent the money instead of saving it and were to lose my job, I would be an additional $1500 in the hole.
Can you think of any good, real example of how a Pay Later plan might help you?