Should I Finance a Large Purchase?

“Buy today with no money down and zero interest!”

You’ve seen the ads when shopping for large purchases like furniture. They offer you the option of spreading your purchase over several months or years, with a zero-percent interest plan. To buy it, you may need to enroll in a payment plan; sign up for their credit card; or open an unaffiliated credit card offering an introductory no-interest period. It sounds like a fantastic deal—but is it? Here are the possible pitfalls of this route and the surprising benefits of financing a large purchase under the right circumstances.

When is financing a bad idea?

In general, it’s unwise to buy something you can’t afford. But what if the total price of the sofa is prohibitively expensive, but you can afford the monthly installments? Here’s where it gets tricky. First, nearly every no-interest offer is only temporary. Once the promotional period expires, you’ll likely see a double-digit interest rate. Second, most of these plans come with a deferred-interest clause stipulating that missed payments will be charged with retroactive interest after the no-interest period ends. That means any missed or late payment will cost a lot more than you expected.

With this in mind, it’s best not to finance a large purchase if any of these apply:

• Finances are extremely tight. If you regularly have trouble making it through the month, you’ll likely find it difficult to meet the monthly payments.
• You are not a careful spender. If you tend to blow the budget each month, you’ll be better off skipping a financed purchase.
• You don’t have an emergency fund. Any unexpected expense that arises could throw your budget off and cause you to miss one or several payments.

When financing can work in your favor

Here are two reasons you may want to finance a purchase you can pay for today:

1. To boost your credit rating. If you’re working on improving your credit score, adding a payment plan to your credit file can help boost your score. This will only work with a payment plan because retail credit cards opened to fund a specific purchase generally only cover that purchase, increasing your credit utilization rate and hurting your score. In addition, a credit card won’t help diversify your credit file.
2. To invest your cash in a high-yield account. If you have the cash saved up for a large purchase and are offered a no-interest payment plan you can afford, you may want to invest that money instead of using it to pay for your purchase.

Remember: Only go this route if you are absolutely sure you can meet the monthly payments.

Whether you choose to finance a large purchase ultimately depends on your financial reality, personal discipline and personal preferences. Be sure to consider every angle before making a decision.