I watched this furniture store television commercial the other day, and wondered how many people would be foolish enough to make a purchase under the loan terms. The commercial had an example, where the buyer (You and I), could buy a front room furniture group valued at $2,599.00 for only $35.00 a month! Sounds great, but to make the offer even better, they also offered no interest fo the first five years.
Wow, we should all rush out and buy furniture with that offer right? Not so fast, let’s look at it a little closer. If we were to purchase the furniture at 0% interest and made payments of $35 a month, how long will we be paying as out furniture gets worn out?
$2599.00 / 35 month = 74.26 months worth of payments. 74.25 months / 12 = 6.2 years of payments! How worn out will out front room furniture be in six plus years we will need simply to pay it off? Then there is the interest!
There is what looks like a great deal, “no interest for five years!” Wow, sounds great. If you look closer and listen better, there are no interest payments for five years. They are still calculating interest each month, but interest is saved until five years of payments are made. Of course they are charge interest on the interest itself.
Then there is interest. If it were only simple insterest, lets pretend at 10%. That would be $260.00 dollars worth of interest. That’s not too bad. Unfortunately interest does not work that way unless you ae borrowing from your parents.
In the long run, those cheap payments of $35.00 a month for $2,599.00, probably end up costing somewhere in the neighborhood of five or six thousand dollars and ten years to pay off!
Fortunately, there is a fairly simple to use financial formula named, Future Value of Money. It looks seriously complex, but you can do the calculation on your phone, and find out what a purchase on credit will really cost you.
FV = I x (1 + (R x T).
I = Investment Amount
R = Interest Rate
T = Number of years
This is the handiest formula for anyone who is on a tight budget and is considering making payments on a purchase or credit card.
I won’t go into detail, as you are either not interested, or intimidated. Instead, I have collected web links for you to look at, that make the process simple. What is really good about future value of money is it can also show you which savings or investment plan is better for you. It takes the slick wording out of any purchase on credit or savings offer. Enjoy!
Understanding the Time Value of Money
Time Value of Money (TVM)
Introduction: What is time value of money?
The above webpage is comprehensive, but a little tedious. I found you can ignore the warnings.
The Time Value of Money (Explained)
Present and Future Value: Calculating the Time Value of Money
For the daring among you. A little more serious, but worth knowing.
Present Value – PV