0% APR, Same As Cash, and No Interest No Payments

Do you know the difference between “0% APR for 12 months” and “12 months same as cash”? What about “no interest, no payments for 12 months”? If you are offered all three payment plans, which one do you prefer?

If you pay off the balance within 12 months, all three work pretty much the same. You basically have an interest-free loan for 12 months. Things start getting interesting (pun intended) when the 12 months end.

The 0% APR deal is usually used by credit card companies for balance transfers or purchases on a new credit card. During the promotion period, you are required to pay minimum payments, say 2% of your outstanding balance. After the promotion ends, if you still owe a balance, you start paying interest on that balance at the regular credit card rate.

The “same as cash” deal is usually offered by a retail store. You have to sign up for their store credit card. You also make minimum payments during the promotion period, same as in the “0% APR” deal. If you don’t pay off the balance in full by the end of the promotion period, you pay retroactive interest from the very beginning, at a rate often 20% or higher. It’s called a deferred interest financing program. If you pay one dollar less or one day late, you still activate the retroactive interests. Basically you have this time bomb ticking. If you defuse it before the clock strikes twelve, you escape unscathed. If you miss it, it explodes in your face.

The “no interest, no payments” deal is also a deferred interest program. The only difference is you don’t have to make minimum payments during the promotion period. It’s even more onerous than “same as cash.” Because you don’t make payments, your payoff balance is higher and you owe more retroactive interest if you can’t pay it off.

A reader recently e-mailed and asked me what to do when the lender for his “24 months same as cash” deal offered to give him a $50 credit if he pays it off early. It’s a sign of change in times. Instead of waiting until the end and catching the victims who fall into the trap, the trapper is willing to let the pray go with a parting gift. I made a calculator to show the interest he can earn from money in a savings account for the remaining term is worth about $50. Because the interest is taxable while the credit from the lender is not, he’s better off taking the credit. More importantly, paying it off now gets him safely out of the trap. If he accidentally triggered the trap, there’s more than $600 of deferred interests waiting for him. If anyone else faces the same choice, the calculator is here:

Deferred Interest Financing Calculator

Retail stores love to push these “same as cash” or “no interest no payments” programs because they help the store sell more expensive products. Add a Kindle to your cart in Amazon and you will see an offer like this. The store also receives a kickback from the lender. The federal regulators recently announced some new regulations on unfair or deceptive acts or practices which banned two-cycle billing and universal default by credit card companies. I’m disappointed happy to see that they did nothing to disallowed deferred interest programs like “same as cash” or “no interest, no payments.” The deferred interest programs are evil. They make credit cards look like nice guys. Two-cycle billing is going back one statement cycle. Deferred interest programs go all the way back to the very beginning. If two-cycle billing is unfair or deceptive and must be banned, why should deferred interest be legal?

[Update on Jan. 14, 2009] Upon closer reading of the final rules, I see the deferred interest payment plans like “same as cash” or “no interest, no payments” are actually not going to be permitted after July 1, 2010. See follow-up post Deferred Interest Payment Plans Banned.

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Comments

  1. Ted says

    tfb, I did not know the difference between 0% APR offers and the “same as cash” offers. I assumed they were all the same. So this post was informative.

    By the way, thanks help with the problem (it was my issue). I paid it off and recently confirmed I qualified for the $50 cash bonus (not credit). I just have to wait 6-8 weeks and I will let you know if they actually send the check.

    I wonder if this offer has anything to do with their liquidity and the credit crisis?

  2. Ted says

    By the way, if anyone is wondering, it was HHGregg. I replaced the 10 year old slowing breaking appliances in my home last April. They sent an email last month offering $50 for paying the balance in full instead of going until then end of the promotional period (April 2010).

  3. says

    Ted – You asked “I wonder if this offer has anything to do with their liquidity and the credit crisis?” They offered you $50 to close it out because they wanted to reduce their credit risk exposure. If the economy deteriorates and you are not able to repay them the money when it’s due, they will be in trouble. So they’d rather pay you $50 and get the money into their coffer now.

  4. Philip says

    I have a “same as cash” deal on some automotive work that I got done. I could have paid it in full but they offered that and so I have it paying the minimum with 3 warning reminders for when this is coming up due so as not to miss it. One thing of note that I saw on the statement was that it showed the accrued interest if I do not pay it on time. I think having that sit there looming will grate on my nerves but at least I know how much is there.

    Question: With credit cards that you get cash back I recieve the $250 from them as a check, I assume that I will have to pay taxes on that, are you saying that if they just applied that as a credit on my next statement that it would not be taxable? Is there an advantage to the credit card company giving it as a check instead of credit on my card? What about getting gift cards and other such items with it instead of the cash, are you supposed to claim that value as taxable income?

  5. says

    Philip – Credit card rebates, whether paid by check, as a credit on the statement, or in the form of gift cards or merchandise, are not taxable. Interests earned from money sitting in a savings account are taxable.

  6. James says

    Thanks. This has been helpful.

    I am currently looking for a way to purchase an engagement ring without making ridiculous payments and/or getting charged interest. Because of school limiting the amount of time I can work it would be extremely beneficial to wait until next summer to pay the ring off. Now I understand what I’m looking for in a credit card.

  7. Kate says

    I have used the ‘no interest, no payment’ plans numerous time for big ticket items. I have always paid them off before the bomb went off. It is a matter of being an informed consumer who knows the risks before taking the plunge. I am sorry to see these programs go. But before they do, I am going out today to buy new mattress sets for two bedrooms on a 24 mo. no interest, no payment plan from Sears!! Woot!

  8. rita burke says

    I recently purchased an air conditioner and financed it through Wells Fargo Bank for “12 months same as cash”. I was told that the new credit regulations of January, ’10 require me to pay the interest every month and the principle at 12 months! I was charges a penalty for being late for the interest payment. ” Same as cash” shouldn’t have an interest charge! What gives?

  9. Ana says

    I don’t think it should be illegal, I purchased a fridge for 1200, with 12 months no payment no interest, I paid it off in 3 payments before the 12 months were over. If the consumer knows what he is doing he/she can take full advantage, I for one was able to replace my broken fridge way before I could save up the money for it.

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