You’ve probably seen the ads: “No interest for 12 months,” they exclaim. “Same as cash!” And chances are, you may have taken an offer like that. I know I have. Maybe you want new carpet for your house, and saw that you could get it today while paying no interest. It seems like a no-lose situation. But is “Same as cash” really the same as cash?
Put simply: No. “Same as cash” is really just another debt myth that it’s easy to buy in to.
Now I know there will be a chorus of “But I use credit responsibly and pay it off in full before the time is up” and “It’s smart to leverage your money”.
I used to think the same way.
And in fact I’ve taken out 12 month no interest home improvement loans before, and I paid them back in time and really did avoid additional charges. But I won’t be doing that again, because it’s not worth the risk.
That’s because there are problems with that kind of thinking. Borrowing money for 90 days or a year or whatever is not the same as cash. If you tell yourself that, you’re doing the store’s advertising for them. The only way it might even come close is if you already have the money for what you’re buying sitting in the bank in addition to your emergency fund, and that money is available right now and not tied up in something else.
I’m willing to bet that most people who do same as cash loans (and it is borrowing money, otherwise why would you need to apply and have a credit check?) do not have the cash already sitting there. Instead, they do a little mental calculation that says they will earn x amount extra per month and can afford to send that in — so they’ll have it paid back in time.
What “same as cash” offers really are
“Same as cash” offers are really advertising techniques designed to get you to spend money right now that you might not otherwise have spent at all. You see the ads, and start thinking about what you could buy. Then you start rationalizing, and before you know it you’ve spent money that you don’t even have yet.
They’re also a money-making proposition for the stores who offer same as cash deals. If they lost money at it, they wouldn’t continue to offer it. People buy things they didn’t intend to buy, or buy them earlier than they intended to buy — and often end up paying huge amounts of interest if things don’t go exactly as planned. Whose life always goes perfectly?
The real problem
The real problem with no interest for x months offers is that they increase your risk. Sure, maybe you can repay the money you owe in time. You borrow $5000 for a remodeling project and plan on diligently sending in $416.67 a month until it’s repaid in full by the deadline.
But maybe you can’t. Life doesn’t always go perfectly. For example, what if you forget to make your last payment by a day? You owe interest. Or what if you lose your job and no longer have the extra $416.67 a month coming in that you’d planned on sending in? You’ve got increased stress, and if you don’t get a job quickly and come up with the money in time to repay the loan in full, you’ll owe interest.
Cash isn’t risky. Borrowing money is.