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Buy now, pay later

When Scott and Faith Cox bought their first home late last year, they wanted everything be perfect when they moved in. That meant buying new furnishings, appliances and even a plasma television -- something they couldn't readily afford on top of their down payment. Rather than making do with their old student-type furniture and hand-me-downs from family, they opted to finance new bedroom and living room furnishings through a no-interest-and-no-payment-for-a-year plan.

"If you know what your financial circumstances are and that your income is good, why not have now and pay later if it's stuff you had planned on buying anyway," says Scott, who asked that their names be changed to protect their privacy. He adds that "while it's a great option, you have to be disciplined about it."

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For the Toronto-area couple, that means following a strict budget and setting aside money each month so they'll be able to pay off their debt in full before it comes due and interest charges kick in.

The magic question
That's the smart way to handle a deferred-payment plan, but not everyone is able to pay off their debt and avoid added fees. "It's not been my experience as a credit counsellor that that works out very often," says Margaret H. Johnson, president of Solutions Credit Counselling Service in Surrey, B.C. She advises people to ask themselves one thing: "If you can't afford to buy it today, what makes you think you're going to afford it a year from now?"

Still, Canadians continue to borrow money and buy things they can't afford, often getting caught in a dangerous cycle of debt and high interest payments. Buy-now-pay-later plans are abundant these days partly because of relatively low interest rates and people's desire for instant satisfaction, but also because lending companies are making big bucks off them.

"The average client in credit counselling is $25,000 in debt, in plastic" and most also have buy-now-pay-later plans to contend with, says Johnson. "It's a debt that has a very hefty price tag."

Buyer beware
For retailers, deferred payment plans are useful marketing ploys. They entice consumers into the store and help them buy things they often can't afford. Potential borrowers are screened and usually subjected to a credit check; however, it's not a very onerous process. As part of savvy sales tactics, credit can be granted within minutes after filling out a form and supplying a credit card number. Often, a salesperson makes a quick phone call and the debt is all yours.

In some cases, retailers require customers to take out a store credit card for the purchase. Store cards have very high interest rates, often with rates of 28 per cent or upward of 30 per cent. Other retailers essentially sell the loans to finance companies or invite such companies to oversee their in-house lending programs. CitiFinancial, for instance, operates a private label business that allows more than 800 retailers operating 4,000 sites across Canada to tap into their credit programs, handling the application, approval and payments on the retailer's behalf.

"Who people actually owe money to is a big concern," says Johnson. "Read the fine print and have the salesperson truly explain it to you."

Read the fine print
It's rare to get something for nothing. In many cases, retailers charge fees -- usually $25 to $100 -- for the privilege of deferring payments, and sometimes you'll be asked to pay the taxes up front. Johnson also says to watch out for low monthly charges between $7 and $10 that don't seem like much at the time, but certainly add up over the course of a year or two.

Know what you're signing, ask the following questions:

"A lot of companies don't make it very easy to pay," says Johnson. "I think it's very misleading for people." One of the biggest problems is that customers really don't understand how interest works and they're shocked by how much they end up owing.

One lender recalls a customer trying to pay off his debt in full just after the due date. He was charged about an extra $1,000 in interest simply because he didn't adhere to the rules, exactly: "Even of you're one day over, you get charged all the back interest."

The best laid plans
Most people who embark on such purchases have it in their heads that they'll have the debt paid off by the due date, either because they've saved the money or they're expecting a windfall. But what happens when the bonus doesn't come through or savings don't add up?

You might want to consider taking out a line of credit to finance the debt. Lines of credit typically have much lower interest rates than store cards. Use the line of credit to pay off the store debt before it comes due, thereby avoiding back interest, and start paying down the line of credit right away.

When Stuart and Sarah Moorehead were shopping for their kitchen last year, they opted for IKEA, partly due to the store's deferred payment plan. The Toronto couple knew they wouldn't save up enough to pay off the cost fully within the year, but they planned to transfer the outstanding balance to their line of credit. "You have to do the math and it made sense for us," says Stuart, who asked that their real names not be used. "We were never going to be able to afford to buy a kitchen outright, but this at least saved us a year's worth of interest payments on our line of credit."

Deferred payment plans work for some, but know what you're getting into. It's possible to get a bargain if you're disciplined and pay off the debt before it comes due, but always read the fine print and make sure you're not incurring any extra costs.

That said, Johnson has a warning for all shoppers: "The percentage of people who benefit from a buy-now-pay-later program is very small." Her advice? Save now, buy later. Or better yet, "truly understand the difference between a want and a need in your life."

Michelle Warren is a freelance writer in Toronto.

-- Posted: Sept. 8, 2006
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