Consumers have a lot of power today. The Internet has enabled us to review providers and products, make recommendations and research prices before buying. There are also more ways to pay for purchases using credit.
All this gives you more control and purchasing power. However, without careful consideration financing, a purchase can be costly and negatively impact your credit score. If you plan to finance a major purchase instead of using cash here are some things to consider before signing on the dotted line.
Types of Financing Available
There are more financial tools today than ever before. That means there are a lot more options to consider. Deciding which type of financing to use is the first and most important decision you’ll make.
Retailer Financing
Some retailers provide direct financing to customers, but others may offer it through a third party. For example, Crest Financial is an alternative that offers in-home layaways. Unlike traditional layaway offers, the program allows customers to take their purchase home while paying for them.
Credit Cards
One of the most common financing options is using a credit card. However, because of the interest rates (see below) credit cards may not be the most affordable option. They also tend to have low credit limits, which could make it impossible to finance an entire purchase for a high price item.
Short Term Loans
A short term personal loan is one way of getting a lump sum of cash when you’re in a jam and need to make an essential purchase. They can be tricky and expensive if you don’t follow the terms precisely. That’s why they usually aren’t the first choice for most people and should only be used for necessities.
Interest Rates
One of the most important considerations of any financing option is the interest rate. This is the fee that’s paid to the lender for the use of a credit or a loan.
Interest rates vary significantly based on the type of credit that’s being used. Your credit score will also be a determining factor in the interest rate. The higher your credit score is the lower the interest rate will be.
A no interest introductory offer can help keep the total purchase price low, but buyers have to be aware of the terms. Often the no-interest period is short and may be revoked if you make a late payment. If the purchase isn’t paid off at the end of the introductory no interest period the rate could be extremely high. Before taking a no interest offer, consider whether you will be able to pay the purchase off before interest kicks in.
Term Length
Term length refers to how long or how many payments need to be made. If you opt to use a loan there will be a definite term length that specifies when the loan needs to be paid off. Options like credit cards and retailer financing may be more open-ended.
Monthly Payments
Virtually all financing options will specify minimum monthly payments that have to be made. The payment will include interest and principle (funds that go towards paying off the purchase price). One thing to look out for on a loan is a prepayment penalty fee. These may be applied if you pay off the loan early.
Lender Credibility
Last but not least, you should carefully consider the lender’s credibility. Short term loans in particular have a reputation of less than scrupulous lenders taking advantage of borrowers. Another reason to examine the lender’s credentials is to determine how sound and secure the financing will be.
Buyers can check out a lender’s credentials and credibility at the Better Business Bureau. It’s also a good idea to read customer reviews to get a better idea of what it’s like to work with a lender.
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Written by Jon the Saver
