Ladies of Literacy
__________ NEWS TO USE __________
BY TERRY BRENNER
The newspaper ad reads, Nothing down, no payment or interest until Jan. 1, 2002. Sweet deal. You can afford to buy that $500 sofa you spotted a week ago.
But is the deal too sweet? Probably not, if you have no sofa, no credit card and no cash.
On the other hand, if youre not in a bind quite that stiff, consider this, says Scott Burnham, a University of Montana law professor specializing in consumer law. The sofa you buy for $500 now with no payment due for almost a year is probably a $400 sofa. The $100 difference is the finance charge hidden as part of the cost. In effect, youre paying 20 percent interest on your purchase to start with. And the deal could get worse, Burnham says.
fine print says that if you dont make that payment on time a
year from now, there were finance charges over the year that then
become due when you dont pay, he says. So you may
owe $700 or $800.
Burnham offers another piece of advice about credit: People should shop around for it the same way they shop for the best price on goods. For example, a buyer of a General Motors car should look beyond the in-house finance company for credit.
Now that we have the Web, you can often search for financing, he says. Or go to a bank instead of a finance company. Dont rule out a home equity loan, he says. It may be the best value because while tax deductions for most interest payments have been eliminated, home mortgage interest is still deductible.
So if you could get a 10 percent loan from GMAC or a 10 percent home equity loan from the bank, the home equity loan is going to be cheaper because its tax deductible, he says. Essentially the bank will write a check to the car dealership, so youre going to pay the bank for the car instead of paying the dealership.
Another aspect of credit that warrants a heads-up is credit insurance, Burnham says. If a person buys a car and has to get $10,000 on loan or credit over three years, the person who arranged the financing also may try to sell credit insurance to the buyer. This can be either life or disability insurance that will pay off the $10,000 if something happens to the buyer.
But most banks, credit unions and life insurance companies have term life insurance, which is very inexpensive, Burnham says. Taking out a three-year term life insurance policy for $10,000 would probably cost less than the credit insurance.
Like everything else, this is something you can shop around for, he says. And usually, buying it from the creditor is the most expensive way to buy it.