Who doesn’t like to have a well-furnished house or apartment? After all, we see beautiful interior design in every sitcom we watch or magazine we open. We all deserve a classy and comfortable pad, right? But deserving it and affording it are two different things. You should think twice before your next furniture purchase, especially before you finance it. As it turns out, there are two major disadvantages to financing furniture, even at zero-percent interest, along with a few other considerations. So grab a seat, pardon the pun, and let’s take a closer look.
Caveat #1 – Zero-Percent Interest
This marketing tactic has been around for a while, but it’s particularly problematic with furniture purchases. It works like this–the furniture company hooks you in with a “special promotion” where you enroll in a payment plan for the furniture and avoid paying interest. This is great on the surface, because you pay low monthly payment installments, totalling the cost of the furniture. In theory, you won’t waste money on interest, and therefore you also aren’t paying more than the retail price. You can keep money in your pocket for other expenses, or if you didn’t have enough cash to begin with, you can suddenly afford furniture that would have been out of reach otherwise.
And, this arrangement can work. We should mention that the furniture is likely overpriced, but regardless this type of plan can work exactly as it sounds–preventing you from paying more than the MSRP or any interest. But, it all depends on you making timely payments and paying off the furniture in full before the zero-interest period expires.
Fail to do either of these and you’ll likely be in big trouble. Most loans like this have what’s called a “deferred interest clause.” This clause stipulates that if you don’t make on-time payments and pay off the loan in full by the end of the promotional period, you will owe interest retroactively. This can add up quickly, especially on expensive furniture, and dig you deeper in the hole.
If you financed the furniture to begin with because cash was tight, there’s a good chance that you’ll still be in a cash-strapped situation while you are making payments on the furniture. That means that if extra interest is applied, you might not comfortably meet the new payment requirements. And what if you have other unexpected expenses like car repairs or medical costs? In those cases, the furniture loan can become a pretty serious burden.
Caveat #2 – Consumer Finance Loan vs. Revolving Account
Maybe you’ve heard of deferred interest before and are fully prepared to meet the demands of the repayment. Hopefully, that means you also have a cushion (again, sorry for the pun) of extra savings set aside for surprise expenses. That’s great, but there is one other consideration you’ll need to keep in mind–how the loan will show on your credit report.
It turns out that there are two ways these accounts are typically reported, and neither is great. The first is as a loan. That’s no surprise, since most of us naturally think of this arrangement as a loan (monthly payments for a determined amount), but the type of loan is problematic. Furniture loans often fall under the label “consumer finance loan,” which is a type of product typically for those with sub-prime credit. As a result, having this type of loan on your credit report, especially multiple instances, can be viewed negatively by lenders and lower your score. Some folks on the FICO forums have previously reported notation about “consumer finance loans” as an explanation for their credit score.
The other way that these “loans” are reported aren’t loans at all. That’s right, these furniture payment plans can be reported as “revolving” accounts, and this is problematic for a different reason. Installment loans don’t contribute to your credit utilization (the amount of available credit you are using), but revolving accounts do. And credit utilization makes up 30 percent of your FICO score. So, a revolving furniture account can throw a big kink into your credit. Here’s an example: Let’s say you have two credit cards, each with a $5000 limit (so $10,000 total) and you have a $1,000 balance that you’re paying off. In that case, you are using 10 percent of your available credit. But what if you finance a $5,000 dining room set that’s reported as “revolving”? That would bring your available credit to $15,000 and you’d be using $6,000 of it, or 40 percent. All things equal, this could bring down a credit score substantially.
There are a few challenges to sorting all of this out. It’s likely not easy to determine exactly how your credit will be affected or even how the account will be reported. And, this is likely to vary significantly based on the retailer. Perhaps your best course of action would be to ask which bank the store uses for its financing, and then do some independent research to learn more about others’ experience with that company. The Fico forums may be a great resource.
Also, these concerns may not mean that you should get financing elsewhere when purchasing furniture, especially if the store is offering zero percent. You’re not going to find a zero-percent offer with an outside lender. And don’t fall for “rent to own” deals either. Those programs guarantee that you will pay more than the furniture is worth, possibly a couple times over.
Instead, you will need to weigh the cons of in-store financing (what could go wrong if you slip up and miss a payment, and the credit implications) vs. the pros of having furniture right away. In all likelihood, your best bet is to delay the purchase or switch gears altogether and find something cheaper.
If you want to avoid the disadvantages of financed furniture, you have two main options–save the money until you can afford it in cash or buy used furniture. Buying used furniture is a great tactic because furniture is marked up significantly. Thrift stores are often chock full of good inventory, and sites like Craigslist allow you to narrow your search from the comfort of home. Used furniture, like antiques, can even gain value over time. The same is true for furniture that you refinish or re-upholster. And even if your furniture doesn’t gain value, it probably won’t lose much. You might be able to buy used furniture, keep it while you save for a new set, and then sell it for almost the same price you paid to purchase it.
One other option, which might be relevant if a piece or set is going to be taken out of inventory, is to use a layaway program. You’ll want to familiarize yourself with the terms and conditions, and minimize any fees. But, it would allow you to get the furniture interest free.
The most important thing is to ensure that your furniture purchases align with your financial goals and that it doesn’t dig you deeper into a hole. There’s nothing wrong with wanting a nicely furnished pad, but you’ll find peace of mind in knowing that your furniture is paid off and won’t present an additional finance burden.