While I'm sure most people on this sub know about accrued interest, a story from a friend (who's usually quite financially savvy) made me realize it might not be common sense and is worth posting.
My friend, after purchasing his first house, bought around $14,500 worth of furniture, appliances, etc. from two big box retailers. He had applied and been approved for a 0% interest, 24 month consumer loan for the full amount with no minimum payments.
He knew the interest rate on the credit was high (32%), but as he's pretty financially secure with a good job he had no worries about paying it off on time. He apparently was willing and could have paid for everything at the time of purchase comfortably, but figured that a no-interest loan for 24 months is too good to pass up, and he'd be better off investing the money over that time period.
He never forgot about it, and with about 2 weeks left he paid off almost the full balance. He transferred $13,000 from his and his wife's easy to access accounts (chequing). He didn't have the full amount in the two chequing accounts and thought it would be a hassle to move around his investments to pay it off, so he figured he'd just bite the bullet and pay the 32% interest for a bit until his next paycheck came at the end of the month.
He didn't realize what accrued interest is, and that the terms of conditions of the consumer loan stated that if the full amount was not paid by the end of the promotional period, accrued interest is paid on the owed amount from the BEGINNING of the loan. After the promotional period ended, the $1.5k he had left on the account turned into 12k, as two years of compounded 32% interest from the 14.5k was added. Yes, a fairly simple mistake ended up costing him over 10k.
He has taken up the issue with both the financing company, as well as the two retailers (who he claims advertised it as the interest starting after the promotional period), but realistically it is looking like he will be on the hook for the whole amount, as the terms were pretty clearly laid out - he just never took the time to read and understand them.
He told this story to about six of us, and most of the people listening were shocked and had no idea that financing loans can work that way. Hopefully this post can stop others from making what is a simple mistake.
Tl;dr: For many consumer loans you are paying interest for the ENTIRE time unless you meet all the terms and conditions. While 0% financing can be smart, ensure you don't miss any payments and pay off the whole amount or it can be disastrous.
Submitted November 25, 2019 at 05:48PM by Throwaway9949442 https://ift.tt/2XRALU7
