The big stores offer great sales at various times of the year with little cash down and long term installment payment offers. They can offer what first appears to be some really great deals with huge discounts and low interest financing. Some will even offer no pay events were you do not need to make an installment payment for three months or sometimes even longer. I have often wondered how they can do this and how do they make money? How can they offer an item at 20% reduced pricing with zero down and no installment payments for 3 months and still make a profit? As with all things the details are what you need to look at to understand who has the really best deal.

Start with the Price

In order to really understand whether these offers are a good deal or not, consumers must start with the price of the item and comparison shop. For example if the exact same TV set is being sold at two different stores owned by different companies, compare prices and any other services that might be thrown in. If the price at  store A, that is offering zero interest and no installment payments is lower than the other store (B) who wants cash up front, then you are getting a better deal, at least on price . Make sure you are getting the exact same product so that you know you are doing an exact comparison.

Next Look at the Financing

With Store B, you know that you have to pay up front, so the cash needs to be there for you to pay for that TV. If you plan to place the cost of the TV on your credit card and pay installment payments on your credit card, then you will need to add the cost of interest that you will pay to the cost of the TV to get the total cost of the TV.

If you are taking money that was earning you some interest, calculate how much interest you will lose because you have spent this money on your TV at store B. Add this loss of interest to the cost of your TV to get the total cost of your new TV.

Now with the free credit and no payments scenario at store A, it gets a bit tougher. First of all you need to make sure that there are no extra fees for taking out this loan, because that is what it is , a loan with installment payments. If there are fee’s then you will want to add these fee’s to the cost of the TV purchased from store A. Next you need to calculate the cost of interest that you will be charged once you do begin making payments on your new TV. This is the catch that everyone needs to be aware of!

Store Credit Interest Rates

Most stores offer credit to customers as a convenience to help them sell more product. What they often do not tell you is that the interest rates they charge on overdue balances is usually the highest you can get without talking to a loan shark. Rates of 25% to 30% are not unusual. If you will be making installment payments on your TV loan after the grace period is up, you should add the cost of interest to the overall cost of the TV purchased from Store A.

Before you know it these numbers can be quite high and add a lot to the price of the TV. This is really were the profit is for the furniture / appliance stores is. Charging interest rates on unpaid balances of 25% to 30% is a very profitable business.

Before you know it that discount TV, free credit, with no installment payments for some period of time is costing you a great deal. Often, the cost is higher than if you had just paid for it in the first place. Of course we are assuming you had a choice and had the money to pay for it in the first place.

Purchase on Credit or Do With Out

Although these zero down, no payment  deals sound pretty attractive if you are going to end up making installment payments that are based on 25%+ interest rates, then the cost of whatever you purchase is going to be much higher than you anticipated and the deal you thought you were getting is not really that good.

There is no question that financially everyone is better off to wait until they have the cash to buy something. Buying on credit at higher interest rates just increases the overall cost and gives you less to spend on other things. More and more families are doing with out today instead of going into debt with easy credit, especially after the financial crisis that erupted during 2008 and 2009.

Many people cannot even get credit now, while others are just saying it is too scary to be in debt, so I do not want to go there. What happens if I lose my job etc.

Impact of Tight Credit

Obviously this line of thinking has a negative impact on sales at furniture stores and many other industries. Unfortunately this is now a reality and many consumers are taking a really hard look at their purchases and the real cost of their purchases at furniture stores and other locations. No credit means no new debt means no new sales, means fewer jobs for everyone.

Still when Store A offers that discount deal, with zero down and no installment payments for three months or more, it is hard to resist. Just take a few minutes and assess the real cost before you sign on the dotted line. A good question to ask, is, what the price will be if you pay cash. Most furniture stores will be reluctant to make any kind of offer since it removes a potential revenue flow from the bottom line for them. Financing for furniture stores is a big business today and has a big impact on the monthly installment payments for customers.

How many times have you seen the advertisements for loans for consumers with bad credit? Seems as if they are every were these days. Over the past two years many consumers have seen their credit ratings fall due to job losses or because they have over extended themselves. Now it is much more difficult to find an installment loan even if you have the best credit rating simply because the economy has had such a rough time in 2009.

A bad credit rating can have a dramatic impact on your installment loan. For example you may not even be able to find a lender who is willing to lend a loan to you or if you can, they will offer such high rates of interest and tight terms it may not be worth your while to take on the additional debt. So how does bad credit impact your installment payments?

Every installment loan you take out whether it is a car loan, a furniture loan, a debt reduction loan or even a mortgage consists of the same factors.

They all have :

Principle: This is the actual amount of money that you are going to borrow. It will consist of the money you need plus any fees or broker expenses necessary to process the loan. Always examine what fees are being added on to the principle amount to see the true cost of the loan in addition to interest charges. In some cases you may only be eligible for a specific amount for your loan, so these fees are then deducted from the amount you will receive. You might receive less than you asked for simply because of your bad credit rating and your perceived ability to repay the loan.

Interest Rate: The interest rate is the rate at which interest will be calculated. Obviously the lower this number is, the less it will cost for your loan over the life of the loan.  A bad credit rating will also tend to cause lenders to increase the interest  rate, making it more expensive for you to borrow any money. Consumers must also pay attention to how often the interest is calculated. Many loans regardless of the type of installment  loan, are  calculated every 6 months. This means that they calculate the interest you will pay using the remaining principle amount at 6 month intervals.

Some credit cards do this on a monthly basis and payday installment loans might do this calculation on a weekly basis. The net result is the more often interest is calculated, the more it is going to cost you. Always push for 6 months and avoid any installment loans that use shorter intervals to calculate interest. Pay off your credit cards as quickly as possible, since they have the highest net interest rate and are very expensive installment loans.

Term: The term is the length of time you will take to pay your installment loan down to zero. Mortgages come in all terms with some as long as 25 to 35 years, while car loans may be one year to a maximum of five years. Some loans that are intended for emergency funding may only have a term of 30 days.

Regardless of what the term is that you choose, always review whether you will be able to complete all of the payments including interest and fees within this time frame. Failure to do so will require at the minimum a renegotiation of the loan usually at some cost to you the consumer. If you cannot renegotiate or just cannot repay the loan, then your credit rating will suffer even more and make it more difficult in the future to take out an installment loan.

Lastly the term of you installment loan will have a big impact on the monthly payment value. A shorter term means a large monthly installment payment, while a longer term reduces the monthly installment payment. Of course installment loans with longer terms will actually cost more since it takes longer to repay them, hence the interest charges are larger. i.e.. the total cost of the loan will be higher.

Monthly Installment payment: The above three factors, the principle, the interest rate and the term all combine in a mathematical formula to arrive at your monthly installment loan payment.  This is the amount you must pay each month. If your principle or interest rate increases, your monthly payment will increase. On the other hand if the term increases, your monthly payments will actually decrease since you are taking longer to repay your installment loan. The amount of interest you pay over the life of the loan will increase as a result.

Once you understand what each of these items mean and their relationship, consumers can quickly understand why they have bad credit and why they make it so hard to get an installment loan. If you have a bad credit rating, then they the banks, are really saying that you are a high risk customer and may not repay the loan. They will either deny the loan to you or they will increase the interest rate and shorten the term to reduce the risk of possible defaulting on the installment loan.

Higher interest rates and shorter terms make the monthly installment payment a lot higher and perhaps out of reach for many consumers based on their budget or income levels.

As a rule of thumb your total monthly payments should not be any higher than 30% of your total monthly income after taxes. If you have a combination of mortgage payments, installment loan payments and possibly credit card payments that are larger than 30% of your after tax income, you definitely need to take some action to fix this situation.

Anytime you get over this amount, consumers will find it very tough to meet daily living expenses and will have to cut corners until they can retire loans and eliminate payments of this type. If you want to avoid a negative impact on your credit rating always repay your installment loans on time every time.

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