Installment Sales

Q There is a store in town that will allow us to buy furniture with no money down and no interest for six months. We're tempted, but we aren't sure. What do you think?

A You're asking about what the sales industry calls “installment sales.”

The ability to purchase $5,000 or more in home furnishings with no cash out of pocket is too irresistible for many Americans, and companies like the one you mentioned are fully aware of this. The installment sale is a tool they use to boost revenues by selling to people who otherwise can't afford to purchase their products. The problems with installment sales include the following: E The limited up-front cash commitment and low monthly payment entice customers to buy more than they can afford. If buying on installment becomes habitual, it most often leads to crushing levels of consumer debt, with dire consequences for the family. E Many financing plans carry interest rates of 20% or more. While no payment may be required for six months, in many cases interest begins accruing immediately, substantially increasing the cost of the purchase.

E With an installment sale, there is a presumption that you'll be able to meet the required future monthly obligations. Proverbs 22:26-27 reminds us, “Be not one of those who gives pledges, who become surety for debts. If you have nothing with which to pay, why should your bed be taken from under you?”

E In many cases, companies offering installment sales actually have higher prices than other companies because they have to cover losses associated with delinquent accounts. In addition to paying 20% interest, you may be paying substantially more for the item to begin with.

One example comes to mind. A well-known retailer offered a set of cookware for $69.97 with payment in full at the time of sale. Another retailer offered the same cookware on an installment plan that totaled $206.82 over a year and a half.

With that said, there can be times where installment sales make sense. A good example is when an automobile manufacturer has a glut of inventory and develops incentive programs to reduce inventory levels. While I encourage people to save and pay cash for a car, in cases like this it can make sense to leave the money in the bank earning more interest than you are paying to the finance company.

In most cases however, you'll find yourselves much better off saving ahead and paying cash for your purchases rather than falling into the trap of installment sales.

God love you!

Phil Lenahan is managing director of Catholic Answers.

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