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The 0% Financing Trap


Have you ever received an offer for zero percent interest to finance a large purchase at a store? One of those deals where you have a year to pay it off, and if you do, there will not be any finance charges? Sounds great right? Well, it is great, right up until you miss the fine print and they charge you interest on the entire amount financed at the end of the financing period.

This actually happened to one of my family members recently, and it is such a duplicitous business practice that I thought everyone should know about it.  My family member purchased a fairly large item at a Jewelry Store in the St. John's Town Center. The experience in the store, they claimed, was amazing.  The service was top notch, and they were very pleased with the item purchased.  On top of the great service, they were offered another great deal.  For the same price as what they would have paid up front, they could get zero percent financing for a year.

As a Certified Financial Planner™, I love zero percent financing deals. If you are already going to buy something, and somebody says you can pay the same amount later that you can pay now, this is a great deal for the buyer! I have used these deals many times in my life to pay for medium to large purchases, and they have all worked out very well.

Because this seemed like such a good deal, my family member took them up on their offer to provide them with interest-free financing through First Comenity Bank. They received the first statement in the mail a couple of weeks later, and everything looked correct. The total balance was what they had agreed to pay in the store, and the APR was listed as 0.0%. The minimum payment was 1/12th of the total balance, which would put them on track to pay the entire balance in the 12 month period. They immediately paid the minimum payment, and set up recurring equal payments for the next 11 months.  When month 12 arrived, they sent the last payment and had a small celebration to enjoy having paid off the balance in full. However, that was not the end of the story.

One month later, they received another statement, and much to their surprise, this statement listed their minimum payment due as $35.  Upon further examination of the statement, it showed that they had been charged for interest on the entire purchase to the tune of several hundred dollars. How was this possible when they had paid the amount in full within the 12 month period? They picked up the phone and called First Comenity Bank and asked that question. It turns out that the 12 month grace period on the interest rate had started ticking when they made the purchase at Jared, not when they received their first statement!

The company had set their minimum payment to pay off the balance in 12 months, but not within the time limit for the actual zero percent interest deal. Had they divided the total amount due by 11 instead of 12 and made those payments, the interest would have never been charged.  But because their 12th payment actually fell more than 365 days after the purchase, the bank went back and charged them interest on the full amount financed.

According to Comenity Bank, they had done nothing wrong, they could not erase the finance charge, and in short, they were out of luck and had to pay it.  They got angry, threatened to publicly disparage the company and their business practices, but First Comenity Bank held firm that they had done nothing wrong.  What do you think?