Buy Now, Pay (or regret) Later

Usually on Black Friday I write about perspective – that any deal on electronics is not worth the life of the person trampled in the stampede. Another aspect of perspective is appreciating what we have and not constantly yearning after more or bigger or newer. The problem is that understanding the difference between wants and needs is only a first step. It must be followed by the discipline not to ignore reality by buying something anyway, especially something you can’t afford.

What seems to be catching on today is a new gimmick called point-of-sale installment loans. “This holiday season, it's not enough to spot a great Black Friday deal on a big screen TV or a sweater. You need to consider whether you want to take out a loan at the checkout, too.” 

That’s right; shoppers no longer need to go to a bank for a loan to buy something they can’t pay for. An installment loan at checkout breaks the cash register receipt into a number of easy monthly payments. That service is now available at Wal-Mart and at many other retailers, both brick-and-mortar and on line. And installment loans are expected to be “hot this holiday season, as retailers attempt to drive sales and shoppers demand easy-to-understand credit.” Retailers are partnering with finance companies to give shoppers these loans, even to people who might not qualify for regular credit cards. Instead of paying at the time of purchase, shoppers can take the items home and pay in 3, 6 or 12 monthly payments.

This is not a new idea, but was usually limited to big-ticket items. Furniture stores have used it for years. The problem is that the eventual monthly payments add up to more than the original price – sometimes 20% or 30% more. 

Not paying cash at checkout is not new either. Credit cards made that possible years ago, and both arrangements involve interest. But shoppers generally ignore the interest in light of the convenience and recognize some advantages over credit cards. Installment loans have no late payment fees, which are a big revenue source for credit card companies, and people tend to like the idea of a predictable, fixed amount each month.

It really is the same idea as a mortgage or car payment, but now the idea is moving downstream to less expensive purchases. Another source says installment plans have a “wide appeal but resonates most strongly for debit users. Four-in-ten would consider using an installment plan for everyday purchases like groceries and household items.”

An American Banker article has another explanation for the trend; “many younger Americans are uncomfortable carrying credit card balances, partly because they saw their parents struggle with debt during the financial crisis and prefer the more certain repayment terms of installment loans.”

This brings up a few issues. First, the financial problems of the parents of younger Americans were not the fault of the credit card. They were problems of discipline and perspective. Going into debt in a different way is no guarantee of success. Since installment plans have no late fee, what do they do instead, send debt collectors or repossess the sweaters and Christmas toys? (This is not addressed in any of the stories.)

In effect, this is just another marketing ploy to get people to spend money they don’t have. The example in one of the articles was of a woman who bought tires from Wal-Mart. She was all right with paying the $644 in three monthly payments of $224, but she “doesn't remember the interest rate.” (It’s about 18% APR.) In this case, tires were probably a necessity, but sweaters, purses and toys?

All this is happening while U.S. household debt, according to Motely Fool, reached $13.54 trillion earlier this year, “an amount that has risen for 18 consecutive quarters.” 

Wake up America; debt is debt! Have a happy Black Friday, but don’t do anything foolish.

Doing the Math

Often the people who give us information are counting on us not to think too hard about it.  They especially count on us not to do the math.  It’s a reasonable expectation on their part because many people are intimidated by anything mathematical and avoid it whenever they can.  But it doesn’t have to be that way and we will make better decisions when aided by some simple calculations.

What brought this to mind was an ad for a railroad saying that they move a ton of freight 450 miles on a single gallon of fuel.  True, railroads are very efficient, but most people hearing this would automatically compare it to auto gas mileage.  You can’t move a ton of freight in your car that gets 25 or 30 miles per gallon.  If you have a truck that can carry a ton of freight it might get only 18 mpg or less.  That’s less than 1/20 of the railroad efficiency.  But that is the comparison they want you to make.  Their real competition, an over-the-road tractor-trailer can carry a 40,000-pound load.  That’s 20 tons.  According to Popular Mechanics:  “New fuel-economy standards that take effect beginning in 2014 will require semi trucks with a sleeper cab to get 7.2 mpg on level roads.”  Using simple math, 7.2 times 20 = 144 or just about 1/3 of the railroad number.  Our new conclusion is that railroads are indeed more efficient, but not by the huge amount we were led to believe (and trucks are often easier to unload).

Another tricky area is percent calculations.  If the stock market goes down by 20%, then goes back up by 20% is does not end up where it started.  Think about it using 100 as the starting point.  If it goes down by 20%, it’s at 80.  Now 20% of 80 is only 16, so a 20% rise leaves it at 96 (not 100).  Likewise when a store runs a discount of an additional 20% off, here’s how it works.  If the original price was $100 and it was reduced by 30%, it now sells at $70.  An additional 20% off is $70 minus $14 (20% of 70 = 14).  The new sale price is now $56.  You can’t take the 20% plus 30% and expect to get it at half price, or $50.  It seems tricky and a little deceptive, but it’s fairly easy when you think it through.

Look closely at news stories reporting percent changes in defects.  One might feature scary headlines saying that the percentage of school buses failing inspection jumped by 50%.  Buried in the article are the numbers.  Did it jump from 4 to 6, or from 50 to 75?  Both are a 50% increase.  What you may never see in the article is the total population.  Are they talking about 10 or 100 or 10,000 buses?  This makes a big difference, but the headline is designed to catch your eye and elicit concern.

Finally, consider how the government, advertisers and advocacy groups describe savings, spending and crises by manipulating time frames.  Instead of $200 billion per year, we hear $2 trillion over the next 10 years.  Auto loan companies lower payments by increasing the term of the loan (but you will ultimately pay more interest).  We hear about certain diseases killing or affecting one person every 6 minutes instead of a total of 87,600 people (less than .03 percent of the population).  The time frame is manipulated to manipulate your reaction to it.

Sometimes doing the math and paying attention to details can make a big difference in your reactions to numbers.  It may even tell you how realistic the numbers are in the first place.  It pays to be careful.