The Great Deals That Aren’t
Everywhere you turn you see great deals advertised. And great they are, but often for the advertiser and not for you. Some “great” deals are really nothing more than ploys to get you in the door and make you spend more, not less. Here are some of our favorites:
0% Financing for a limited time
A friend recently started a home remodeling project and got a new card at a big box home improvement store that advertised 0% financing for 12 months. What she realized after a month of regular trips to the store is that the 0% financing applied only to the first purchase, and all subsequent purchases were subject to 25.9% interest rate. Sneaky, huh? Sure this was probably written somewhere in the small print, but who reads through a mile-long list of legalese while standing at the register?
Even for loans or credit cards where 0% really does apply to all purchases, you get this rate only if you pay off the loan during the promotional period. If you do not, you will have to pay all the interest that accumulated from the day of the purchase – the interest you thought was forgiven. And, as the financial website Bankrate recently noted, 0% financing immediately stops if you are even one day late, and then penalties and deferred interest kick in immediately.
0% Financing forever
Car companies have been offering 0% financing for years. The interest rate sounds great, but there are three details that often go unreported. First, very few people qualify for 0% financing since a very high credit score is usually required. Second, the terms are often short, which means higher monthly payment. And third, expect to forfeit all cash-back incentives from the manufacturer, which can be worth more than the interest that you are saving.
What can you do? Arm yourself with knowledge before you go shopping. Find out what the invoice price is for the car you are interested in, and what rebates are being offered. In other words, find out what is the lowest price that you can get. Then see if you can get approved for a regular car loan from your bank or credit union, and calculate how much the interest will cost you over the life of the loan. Compare that with the special financing the dealership is offering and see if it really is a great deal.
Point Rewards and Membership Discounts
Say you treat yourself to a mochalattechino at your favorite coffee shop once a week at the cost of $5. On a monthly basis that is $20. But now the store offers you buy-nine-get-tenth-free loyalty card, so you start going more often. Ten times per month, in fact, so you get a free mochalattechino every month. Yaay, right? Well, whereas before you were spending $20 per month on your favorite beverage, now you are spending $45. Where exactly is the saving?
What marketers have known for decades is that store loyalty programs encourage shoppers to spend more. Whether it’s a program where you accumulate points towards some award, or a punch card promotion where you have to buy X of something to get one free, all that is being offered is a volume discount. If you have a store that you love, and where you will shop no matter the deals, then by all means use their loyalty program. But making a point to shop at a business just because of points usually means spending more regardless of a discount.
These deals should really be called Extended Profits, but not for you. Consumer Reports have been advising against extended warranties for years, and have backed up their recommendations with research. This is what they have found:
If the product is going to break, it usually will within the first few months from the purchase when it is already covered by the manufacturer’s warranty. For breaks after this period, Consumer Reports has noted the tendency on the part of extended warranty companies to refuse to cover the repairs, using small print as an excuse. There is often a long list of exclusions that you may not have bothered to read about in the paperwork you signed. And finally, since quality of most cars and consumer electronics has improved, the chances that you will get your money’s worth from an extended warranty have decreased. If you purchased warranties for five products, and one ended up needing a repair, chances are you have paid more for the warranties in total than the costs of that one repair. So next time someone offers you an extended warranty for X dollars, consider putting that money into your savings account instead. This, after all, is the oldest and surest extended warranty known.
Personal Finance Blog
Starting in 2004, this blog series ran for 10 years. Click on the links below to read some of the posts.