CREDIT CLINIC: The real cost of buy now, pay later

Elisa just graduated from university and needs a couch for her apartment. A nearby department store has a great offer: Buy now and don’t pay for one year!

Elisa just graduated from university and needs a couch for her apartment.  A nearby department store has a great offer:  Buy now and don’t pay for one year!

Elisa isn’t working but is sure she’ll have a good job soon. If she takes advantage of this offer, she can get a new couch now, and pay for it once she has work.  Perfect right?

Buy now, pay later offers are also called “deferred payment plans.  While these plans vary, the most common terms are that you can purchase the item today and pay no interest if you pay the entire purchase amount by the due date, usually within six to 24 months. However, there are a few things to watch out for.

Interest: Most retailers charge upwards of 28 per cent interest.  With deferred payment plans, two things can happen at the due date.  You can pay the purchase price in full, in which case you pay no interest.

However, if you don’t pay it off by the due date, the high interest rate kicks in.  In fact, you may be charged interest on the entire amount all the way back to the original purchase date.

In Elisa’s case, if the couch costs $2,000, and Elisa doesn’t pay the entire amount on the due date, she may end up owing over $650 in interest as well as the $2,000 and the interest will continue to accumulate until she pays it off.

Fees: While you don’t have to pay for the item up front, you may have to pay a fee to take advantage of the offer, usually $25 to $75.  In addition, the taxman won’t wait until 2012, so you may have to pay the taxes up front as well.

Can I really afford it?  If you don’t have the money now, you need to have a plan for how you will pay it off by the due date.

One option is to make monthly payments either to your own savings account or to the retailer so it’s paid off by the due date. Simply counting on having more money in the future is risky.

For example, what if the job Elisa finds doesn’t pay enough to pay off that couch?  She can’t return it, and if the high interest kicks in, she may end up paying two to three times what that couch is actually worth.

The bottom line, when it comes to buy now, pay later offers?  Read the fine print so you know what you are getting into and make sure you know how you will pay for it when the time comes, otherwise, you could be in for a very nasty and costly surprise.

Amy Taylor is Coordinator of the Kootenay Boundary Credit Clinic, a project of Castlegar & District Community Services.  The Clinic provides free information and workshops about debt, credit and money management.  Call 1-877-565-0013 or go to www.kbcredit.org for more information.