Furniture stores and other retailers of big-ticket items are quick to try and make a sale. Just like car dealerships, these stores depend on convincing people to make a large purchase.
The salespeople employed by these companies also get a commission for each sale, further incentivizing them to make a sale whenever possible.
Because of that incentive structure, these companies won’t hesitate to offer to help you finance your purchases. Often, the deals can sound too good to be true, like $0 down 0% financing for years.
That can make it difficult to convince yourself not to finance your furniture purchase.
Find out whether using store financing to buy furniture is a good idea.
Financing Furniture Spending is Usually a Bad Idea
Generally, you should avoid financing furniture purchases, or ideally, any large purchase that you make. The reason for this is psychological.
If someone came up to you and offered to sell you a couch for $2,400, would that sound like a good deal to you? Most likely, you’d say no because you’re not willing to spend that much on one couch.
If instead, they offered to sell you a couch for $50, would it be easier to convince yourself to make a purchase?
Seeing the large numbers associated with the full cost of a piece of furniture lets you see how expensive the furniture really is.
By quoting the monthly price after financing, salespeople make it seem like the cost is much less than it is.
The thinking they use is that you already pay bills each month, so how much can another small bill hurt anyway?
Another reason to avoid financing is that stores may be less willing to negotiate on price.
If you let a seller know upfront that you need financing, they’ll focus on your monthly payment, not the total cost of the furniture you buy.
Sellers can use a lot of tricks to make the monthly payment whatever they can convince you to commit to.
Whether it’s extending the loan’s length of altering the interest rate, the store will do whatever it can to get the payment to a number that works for you. That lets the store sell you a lot of expensive furniture without you seeing the true cost.
If you avoid discussing financing, you might be able to negotiate the true price of the furniture. If you can pay in full when you purchase the furniture, you might be able to negotiate a discount. That can help you save money, while financing just hides the true cost.
Furniture Financing and Your Credit
Another thing to keep in mind is that financing furniture is affected by your credit. It also affects your credit.
When you finance furniture, what you’re really doing is taking out a loan. If you’re buying $4,000 worth of furniture and finance the full amount, you’re borrowing $4,000 from whoever is doing the financing.
Like any lender, someone who offers furniture financing wants to make sure that they’ll get paid back. Even though furniture companies have an incentive to let you finance because you’ll spend more if you do, they’ll lose money if you default on the loan.
Your credit score can affect the total amount that you are allowed to finance. If you have bad credit, you’ll have trouble financing a large purchase. In some cases, you may not be eligible for $0 or 0% interest deals due to poor credit.
Once you purchase the furniture, the financing loan will appear on your credit report. This can have a number of bad effects on your credit score.
- New credit inquiry. If the financer pulls a copy of your credit report, that will drop your score by a few points. Each time a lender requests a copy of your credit report, it is noted by the credit bureaus. The record of the request for a credit report is kept for two years. The more requests for a copy of your credit there are on your report, the worse your score will be.
- Young credit line. Another factor is that having a new loan will reduce the average age of your loan accounts. Typically, you'd prefer to exhibit a long history of a responsible relationship with credit.
- Higher debt utilization. Lenders want to see people who have very little debt. That also want to see people who have a lot of credit available to them, but who don’t carry a large balance.
Once you pay the financing loan off it may benefit your credit score slightly as it improves your credit utilization ratio. However, the negative effects far outweigh this small positive.
Alternatives to Store Financing
If you want to buy new furniture, there are some alternatives to store financing that you should consider.
Cash is a great way to pay for a large purchase like furniture because it gives you bargaining power. Sellers like to offer financing to convince people to spend more than they can truly afford.
However, when they offer to finance a large purchase, they spread out the income from the sale over a large period. In some cases, they won’t get all of the money because the buyer eventually defaults on the loan.
When a furniture sell makes a cash sale, they get a huge boost in income immediately, which has significant value. If you can pay with cash or by check, you might be able to negotiate a discount since the seller will get the full amount of the sale right away.
Don’t be afraid to try to haggle if you have the cash to cover the purchase. Negotiating can seem difficult and scary, but it doesn’t have to be. The worst that can happen is the seller refuses to cut you a deal, leaving you to decide whether to make the purchase at sticker price.
If you want to pay in cash, you’ll have to take time to save up enough to cover the full amount of the purchase. The best way to do this is to open an online savings account.
Online savings accounts have very low minimum balances and tend to be fee-free. They also pay some of the best interest rates available. That makes them a great place to stash money that you’re planning to use for a goal.
Rewards credit cards
Rewards credit cards are another good way to make a large purchase, but only if you pay off the bill right away so you don’t pay interest charges.
Cash back credit cards will give you a percentage of the money you spend back as cash each month.
The real trick, however, is taking advantage of a credit card sign-up bonus. Many premium rewards cards will give you a big reward if you sign up for the card and spend a certain amount of money within the first few months of having the card.
If you’re making a large purchase, you can meet that requirement in one fell swoop, or at least get very close to it. Using the opportunity to get a big bonus is like getting a huge discount on the purchase.
Again, the only way this strategy is worth it is if you pay the bill in full at the end of the month. Any interest you get charged if you don’t pay the bill will quickly eclipse the value of the rewards you earn.
0% APR credit cards
Finally, you can consider opening a 0% interest credit card to make the purchase.
Many cards offer a sign-up incentive where they charge no interest for the 12-24 months after the card is opened. All you have to do is continue making the minimum payment each month.
This strategy is a lot like financing through the furniture store, but it places a shorter timer on your payment plan. This can help you avoid spending more than you can afford and helps encourage you to pay the loan off faster.
It also leaves you with a useful credit card after the loan is paid off. Having another credit account that continues to age can provide a long-term boost to your credit score.
In general, financing furniture purchases is a bad idea.
Furniture stores offer financing as a ploy to get you to spend more than you can really afford.
Consider an alternative such as a cash payment, rewards card, or 0% interest credit card. All of these options help you save money or avoid long-term debt.