Why Free Financing Isn’t Free

A few weeks ago, I was driving home from work, listening to the radio, and I heard an ad from a national furniture store that went something like this:

“This Friday, 25% off storewide OR free financing for 5 years.”

I thought to myself, “That isn’t free at all.” A little back of the envelope math shows if you could buy $10,000 worth of furniture at $7,500, the annual interest rate over 5 years is roughly 6% and costs you $2,500 if you pay $10,000. How is that free? That’s like agreeing to buy a house for $1,000,000 instead of $750,000 but the seller gives you an interest free loan. No thank you.

At least this furniture store was willing to share what the real cash price of the furniture is - $7,500 in this example. Many places don’t offer the discount and just push free financing. So, ask! If the company installing the new HVAC is offering 18 months free financing, ask for a discount for paying cash today.

Aside from the simple math, I think it helps us spend more wisely. I’m all for buying new furniture, and replacing the HVAC is a must, but paying $7,500 in cash helps you feel the significance of the purchase more than “a simple payment of $166/month!”

Thank you for reading,

Alex

This blog post is not advice. Please read disclaimers.