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Question of the Day: When is Debt Real Debt?

By JLP | February 20, 2008

Sorry for the confusing title but I couldn’t think of another way to say it.

I was reading NCN’s plan for life after debt
and it got me to thinking about the following question:

Let’s say you have a sizeable savings account and have allotted $2,000 of your savings for a new TV. You go shopping and find the TV you want and the total comes to right at $2,000. You are about to pay cash when you find out that the store offers 0% financing for 18 months. If you decide to take advantage of the 0% offer (assuming there’s not a deal for paying cash), are you taking on debt even though you have the cash to pay it off at any time?

Now I realize there are all sorts of “what if…” scenarios that could go along with this situation. However, lets just say that you are disciplined and would not charge the TV and then go spend the $2,000 cash on something else. Also, keep in mind that you aren’t spending money you do not have as we have assumed that you saved up for the TV. In other words, you’re not buying now and paying later.

Personally, although you are taking on debt, I see nothing wrong with taking advantage of the 0% offer. In my opinion, it really isn’t debt if you have the resources to pay it off at any time but choose to not to. I look at it as a way for a smart person to use debt for their own benefit even though the benefit is relatively small (about $91 if you get a 3% interest rate on your savings for 18 months and less if you have to make monthly payments since you will be drawing down your $2,000 over the 18 month period).

Now it’s time for you to weigh in.

Topics: Budgeting, Credit, Credit Cards, Question of the Day | 29 Comments »


29 Responses to “Question of the Day: When is Debt Real Debt?”

  1. Phyllis Says:
    February 20th, 2008 at 11:09 am

    I like the 0 interest rate “loans”, bought a TV, Washer and Dryer and Fridge using that free money concept. Paid it off over time, kept my money in the bank earning interest. Took no time each month to make the payment, no hassles. I used their $ for free. What a deal. And we could have paid in full for each item. You only see these offers on a limited basis, when inventory is high, or people are not spending. Keeps the stock looking good for the company as they are still “selling”. Usually the 0 interest loans only apply to certain stock. Seems to be a winner for all involved.

  2. Dylan Says:
    February 20th, 2008 at 11:11 am

    I say, if you owe it, it’s still debt. It might be no-cost or low-cost debt, but it’s still debt.

    Debt isn’t always wrong, and debt is not as much the problem as the cost of debt can be.

  3. RLJ Says:
    February 20th, 2008 at 11:23 am

    I think it’s still debt as all legal and vernacular definitions would define it.

    However, should you do it? I’m currently taking a class called Maths of Finance through the accounting course I’m in. I’m becoming more and more convinced that everyone no matter what their area of study is should have to take this class. This way individuals could do their own calculations to figure out the wisest plan financially for them.

  4. Toby Says:
    February 20th, 2008 at 11:30 am

    That is not debt, it is arbitrage.

    If you are disciplined and detail-oriented enough to keep track of this debt, than it can be a smart move to take advantage.

    I usually look at the size of the purchase and how much additional work it will be (do I need to open another store account, etc.) to decide if the profit is worthwhile. Often times the interest on a couple thousand may not be worth the hassle but financing a car purchase @ 0%, for instance, may be worth hundreds.

  5. Watson Says:
    February 20th, 2008 at 12:17 pm

    It is debt. But in the grand scheme of things, net worth is what matters (assets minus liabilities), so they would cancel each other out anyways.

  6. Eric Toya Says:
    February 20th, 2008 at 1:19 pm

    Technically, of course it is debt. But let’s not forget that money is very much a commodity. If you can get it cheaply, and 0% is as cheap as it gets, then you should. Of course, this assumes that you manage it responsibly.

    However, in this example, I’m not sure the $2,000 is worth the trouble. As you noted, you will earn appx $91 in interest, and pay taxes on that $91. Not to mention the risk of paying what is likely very high interest charges if you miss a payment or slip up in any way. I would put the purchase on a good rewards card, get the points, miles or cash back, and pay the card off in full with the $2,000 in the bank.

  7. Ken Mott Says:
    February 20th, 2008 at 2:12 pm

    I love 0% offers, since I am in control of my money and i earn 4.25% on my savings.

    Bought the wifes computer from Dell at Xmas and got 0%. 1500 at 0% for a year is nice as it will provide about $60 in income on money i was going to spend.

  8. Amy Says:
    February 20th, 2008 at 2:22 pm

    This is what I did when I bought my roof – except it was closer to $6,000. It is no interest, no payment for 12 months, but if it doesn’t get paid off before the end of the 12 months then the accrued interest for the year gets charged.

    Of course the store card approves you for a limit above the purchase so you can put more on it, but not too much more. It hurts your credit score a bit to have a card close to the limit, but earning interest on the money is nice.

  9. Max Imizer Says:
    February 20th, 2008 at 2:45 pm

    Sometimes you can work with the store/ vendor to reduce the price if you pay cash versus doing the 0%. I try this every time and it works about 1/3 of the time. So my 2000 TV costs only 1800 in this example. GIve it try it works, if not, take the 0% and invest your money in a good yield money market until the bill comes.

  10. Master Your Card Says:
    February 20th, 2008 at 5:17 pm

    I think this is a dangerous line of thinking, and frankly I wouldn’t be at all surprised if these sort of beliefs are what get people into serious financial problems to begin with.

    If you don’t pay for it upfront and in full with your own money, it’s debt – plain and simple.

  11. JLP Says:
    February 20th, 2008 at 5:44 pm

    Master Your Card,

    What’s with the preachy tone?

    A dangerous line of thinking?

    I think not.

    What’s dangerous is people who buy things they CAN’T afford on credit. It’s NOT dangerous to purchase something you CAN afford (because you have the money available) but choose to pay for it in a way that’s best for you.

  12. Master Your Card Says:
    February 20th, 2008 at 6:50 pm

    :)

    I’m sorry if my post came across as preachy, I wasn’t intending to preach to you or anyone else for that matter.

    My point is simply that most people rarely consciously get themselves into debt, and speaking with the benefit of hindsight, I have made some rather dubious financial decisions when confronted with 0% financing. On several occasions I have had the cash to pay for the item ‘up front’, but have chosen the financing option instead. Lo and behold, when the ‘honeymoon period’ expires, I suddenly realise that I no longer have the disposable income needed to pay for it.

  13. Steve Says:
    February 21st, 2008 at 12:22 am

    It is a debt, but I am a strong believer in good debt/bad debt. This is good debt. The biggest factor is the timeframe. If you can get that TV but on no interest for 3 years, then you are paying with deflated dollars at the end of the run, plus the money in the bank. If you are getting 3% on your money in a bank account, then with inflation, you are actually getting 6% per year. The more years, the better. However, it only works, as many have stated, if you have the money to pay it off at any time. If you don’t have the money, then you are borrowing against future income, which is a bit more dangerous.

  14. Beyond Paycheck to Paycheck Says:
    February 21st, 2008 at 7:39 am

    Is it debt?

    When you owe money, you have debt. Certainly the company you owe it to thinks of it as an asset.

    Is it a good strategy?

    Executed to perfection (per your post: you don’t spend the money elsewhere, you save it and thereby earn interest, and pay it off timely), it is an effective strategy. However, as others have pointed out, your financial reward is minimal ($91 before tax) and the risk is great (you don’t adjust your emergency fund upwards to reflect the fact that $2K will be owed for a non-emergency, you inadvertently miss the payment and are charged back interest, etc.) And of course, this could reflect negatively on your credit report (another credit review plus a higher outstanding balance).

    Summary

    Companies don’t offer these deals to be generous. Even in this credit-tightening time with more defaults than recent memory, they’re still offered for one reason: they make big money for the lender. If you’re a party to a transaction where the other party expects to make big money, you can rest assured, you won’t be.

  15. solwoldjr Says:
    February 21st, 2008 at 8:29 am

    I am a big fan of using this method ONLY if you have money and discipline. I recently bought a new water softner and water purifier system. I talked the salesman into giving me $100 off the $2500 price tag if I paid cash up front instead of financing. He said he’d send me a bill and I could pay in full.

    When the bill came I noticed they had set me up on a 12 month no interest plan. I called to check on this as I had negotiated a cash in full, but the office said they had us on a 12 month no interest. So I took my $2400 and put it into a 6-month CD at 5.3% interest. After the 6 mos I’ll move it into a MM. I should make somewhere over $50 on money that I would have already spent.

    Like I said earlier, you have to have the money up front to pay for the item AND the discipline to not touch the money.

  16. MeMySelfAndI Says:
    February 21st, 2008 at 8:54 am

    Don’t they require an ‘administration fee’ for setting up the account? The one time I used the 0% I found that that was more expensive than interest you would receive on the money.
    Obviously the companies are betting on Average Joe who is not so disciplined and will pay to late, against huge interest rates.

  17. JLP Says:
    February 21st, 2008 at 9:10 am

    Lots of good comments on this.

    I think before you take advantage of a 0% offer, be sure that the store won’t offer a cash discount. If you know that the discount is greater than the after-tax return you could get on the money in your savings account, then go for the cash discount and pay cash. Sometimes they might negotiate with you. It doesn’t hurt to ask.

  18. Matt Says:
    February 21st, 2008 at 1:59 pm

    Personally I think this would work assuming there were no hidden caveats to the deal. This would essentially allow you to make some money on that purchase but over the course of 18 months a lot can change and you might end up needing that $2,000. If you didn’t have the money just before the offer ran its course you would all of a sudden find yourself with real debt.

  19. JLP Says:
    February 21st, 2008 at 3:01 pm

    Matt said:

    “…over the course of 18 months a lot can change and you might end up needing that $2,000. If you didn’t have the money just before the offer ran its course you would all of a sudden find yourself with real debt.”

    But what happens if you spend the $2,000 cash on the TV and then you find out you need that $2,000 for something else? Don’t you run that risk whether you have the $2,000 at your disposal or not?

    Besides, in my example I stated: “Let’s say you have a sizeable savings account and have allotted $2,000 of your savings for a new TV.” So, I was assuming that there was ample savings there for emergencies and whatnot.

  20. Cully Perlman Says:
    February 21st, 2008 at 5:20 pm

    In business school you learn that some debt is good debt. Personally, I hate debt of any kind. I’m a cold hard cash type of guy–but I do have great credit. I just like know that I don’t owe anyone anything, and that the cash in the bank doesn’t have someone else’s name on it.

  21. Meg Says:
    February 21st, 2008 at 6:41 pm

    Of course it’s debt, but of course you should do it. Its like why you keep your mortgage even if you have money in the bank to pay it off.

  22. Debra Says:
    February 21st, 2008 at 6:46 pm

    I think that using 0% financing, and earning interest on the money is a very good idea. I would put the money into my savings account, set up a scheduled transfer to my checking when the bill is due, and then schedule the payment through online billing. This would help me to avoid forgetting to pay the bill and incurring the finance charge (which would defeat the whole purpose of using 0% financing). I may have more tolerance for petty things, but $91 eventually grows to be thousands. To me, it is no more time consuming than remembering to bring my re-usable grocery bags before I go shopping.

  23. Kitty Says:
    February 22nd, 2008 at 5:40 pm

    As most people said- it is a debt, but as long as you have money available at the moment notice, it is a good idea. $91 may not be much, but it is free money. Most people, even those with money, don’t consider $91 pocket change. I usually look at an amount of money in terms of what it can buy (even if I don’t plan to spend it). I can think of a number of things $91 can buy.

    I don’t see it as very dangerous or time-consuming either. The trick to never being tempted to spend the money you owe is never to think of it as yours no matter who you owe it too – bank, store, credit card, or a friend. It’s like something a friend gave you for safekeeping and being an honest person you aren’t going to use it until you need to give it back. It is morality as much as discipline.

  24. Minimum Wage Says:
    February 22nd, 2008 at 10:01 pm

    Those 0% deals are OAC (On Approved Credit). If someone couldn’t get approved, they’d have to pay cash. If they pay cash, they lose the use of their money immediately, unlike the 0% credit buyer. Shouldn’t the cash buyer get a discount?

  25. "Mo" Money Says:
    February 23rd, 2008 at 8:56 am

    I don’t think this is a good strategy. It has some pitfalls for a lot of people. And the the TV is not worth the money that you paid, because it is now “used”. Your net worth did not cancel each other because of the value of the used TV. This could work for some people, but for most they do not have the discipline to carry this off. So I would not spend a lot of time trying to decide whether or not it is a good deal for me. The company offering this “deal” know that the majority of the time they will benefit from the transaction. You can win if you have the discipline, and if you do not have an emergency during that time frame. Your are taking a risk and that could be costly. Don’t do it!

  26. Kitty Says:
    February 23rd, 2008 at 9:20 pm

    @”Mo” Money: the example in the original entry above specifically said that a) the person already has “a sizeable savings account” and b) has enough cash to buy a $2000 TV but wants to play a little arbitrage. If you have a sizeable savings account, there is no danger that you’d need this money in an emergency – this is what a “sizeable savings account” is for. To me a “sizeable” savings account means a lot more than what one plans to spend on a TV.

    I also don’t understand your saying that a TV isn’t worth the money “because it is now used”. The same applies to anything you buy. TV isn’t an investment, it’s something one buys for entertainment. Not everything one spends has to be on “needs”, nothing wrong with a bit of entertainment if one can afford it. If one cannot afford a $2000 TV or would have to spend most of the savings on it, one shouldn’t buy it whether with 0% or with cash. Same applies to a $20 worth of entertainment if one cannot afford it. It really depends on what percentage of your savings $2000 represents.

    Minimum wage, some places do give discounts on paying cash. Others don’t.

  27. Frugal Momma Says:
    February 24th, 2008 at 6:10 am

    It is still debt in my opinion.

    Those 0% deals always have catches on them. If you miss one payment, you get hit with interest or if you don’t pay it off by the payment date you get hit with interest. I would rather err on the side of caution and not have that hanging over my head. Life happens, people forget and you get dinged.

    Most people taking these 0% deals already have credit card debt and are probably going to default-otherwise the stores wouldn’t offer them.

  28. Debt General Says:
    March 6th, 2008 at 10:38 am

    I are doing great job paying off debt like that. Keep doing it and get free.

  29. William Says:
    March 21st, 2008 at 1:33 pm

    Debt or no debt, NOT THE ISSUE with these types of loans. You really need to ask and find out who is holding the paper for the 0% time frame. Most of the time you will be shocked to find out it is a finance company. Now here is the REAL ISSUE the three credit agencies will deduct points from your credit scores. Because the computer models recognize these lenders as finance companies. Why take away points? Because finance companies are recognized as “lenders of last resort”! This credit action will follow you for some time. With the tightening of credit lending rules this could end up being a problem for you in the long run. You are better off applying for a credit card with a 1 Year 0% purchase feature or a 1% – 3% longer term rate. Find out who the lender is and if they are a finance company before signing. The score hit comes because of who you had to do business with not your pay history.

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