How Many People Don't Pay In Time On Those 0% APR Offers?
We have all seen these offers (what in industry parlance are known as deferred interest promotional financing). These amazing offers where you can buy a big ticket item now (TVs, appliances, furniture) and not have to make payments for a period of time. How cool is that? Immediate gratification in return for future pain. Of course they also come with the fine print, which is often smaller than you see on the image above. The dirty secret (it’s not really a secret; it’s just not well understood) is that if you don’t pay in full by the end of the promotional period, well the interest is charged from your original date of purchase. Oh, and don’t expect a single digit interest rate either!
Well, if you wonder why these offers are so popular with retailers, let’s just say that in addition to providing a short-term sales boost, retailers also collect interest in many cases as consumers don’t make full payment by the end of the promotional period.
Payoff rates have declined slightly in recent years. (Payoff rates capture the share of accounts or of promotional balances that are paid in full before the expiration of the promotional period.) For six and 12 month promotions accepted in 2013, about three quarters—by incidence and balance volume—were paid in full during the promotional period. That compares to nearly four-fifths for similar promotions originated in 2010. Payoff rates vary significantly according to the credit score of the consumer holding the account. Promotions taken by consumers with superprime scores consistently pay off at rates well in excess of 80%. Those taken by consumers with deep subprime scores fall below 50% on some payoff measures. Those consumers are not getting the “no interest” benefit that they may have expected when they accepted the promotion.
So, overall about 75% pay in full, with super-prime customers paying off at rate in excess of 80% while subprime borrowers fall below 50% in their payoff rate. This should cause consumers to take pause before jumping on an offer like this!
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.
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