Interest-Free Financing on the Rise

Computer companies do it, department stores do it, even Home Depot is doing it--offering interest-free financing that’s designed to lure recession-wary consumers during tough economic times.

Free-financing offers are popping up more frequently and in a wider range of storefronts as marketers try to drum up business during the important holiday season.

Auto makers proved the powerful allure of free financing in October, when widespread financing deals drove vehicle sales up by 24.4% for the best single month in industry history.

“You’ve always seen [zero financing] in the big-screen TV and electronics segments; you saw it in October in car financing and now you’ve got other retailers, including jewelers,” said Richard Giss, a retail consultant with Deloitte & Touche in Los Angeles. “It’s one way for big-ticket retailers to get reluctant consumers to buy their products.”

Free financing offers increase “whenever the economy weakens or there’s a weakening in demand for certain products,” said Keith Leggett, a senior economist with the American Bankers Assn.

Even before Thanksgiving, retailers had papered their stores with offers of price discounts. But free financing resurfaced again this year because some customers want it, said Bill Masterson, a spokesman for Sears, Roebuck & Co.

Free financing can be a risky business for marketers. Automotive industry analysts caution that the October sales bonanza could damage auto makers’ bottom lines during 2002 because free financing can cost manufacturers about $2,500 for a $24,000 vehicle, and dry up the market for future sales.

However, financing costs for retailers aren’t expected to be as severe as they were during the 1990-91 recession because interest rates are much lower than they were a decade ago, thanks to frequent rate cuts this year by the Federal Reserve.

The offers, though attractive, clearly aren’t right for everyone.

The bankers association’s advice? Plan your shopping budget well before the holiday season starts and stick with it.

Most of the financing offers require customers to use store credit cards. That’s because retailers hope offers will entice consumers to get a charge card and ring up more purchases in the future.

Experts also warn that consumers should read the fine print on free-financing offers, just as with traditional loans. A few companies require no payment until the principal comes due, but consumers who don’t meet the deadline are in for a shock because interest can be recalculated from the date of the original purchase.

“You end up owing a huge amount of money,” Giss said.

Home Depot’s free-financing offer, which expires Sunday, requires customers to pay finance charges from the date of purchase.

Sears, though, requires no interest payments until the grace period ends. At that time, consumers who don’t pay off the loan are subject to interest payments.

Not all customers will qualify for every free-financing offer. Dell Computer, for example, is offering free financing for 90 days on purchases of at least $500. The offer is for “well-qualified customers.”