If you’re in the market for new furniture, then you probably know that there are a multitude of decisions to make. From size, quality, color, and more… you just have so many options that it’s really hard to make the right decision, but is financing furniture a good idea?
To finance or not is the most important decisions among all your furniture purchase decision making road blocks.
Furniture in Canada can be quite expensive compared to the rest of the world, especially if you’re buying high-ticket items like couches, beds, and dining tables. And since, it’s such an expensive purchase, most Canadians won’t have cash readily available for outright furniture purchase.
Knowing this fact, the furniture stores came up with furniture rent to own schemes to “help Canadians buy the furniture of their dreams”. For many, this may seem like the best option as it allows you to make major furniture purchases without having the cash upfront. Yes, take this home for a fairly low monthly payment.
I’m pretty sure you came across one of these offers and you may not be 100% convinced as to whether or not financing furniture is a good idea, so you decided to make a quick google search on the subject.
Just like any major financial decision, there are pros and cons in financing furniture. The answer isn’t so simple but understanding what financing means for you can help to clarify if wether or not it’s your best choice.
How Does Furniture Financing Work?
Although you can get financing from a number of sources, many furniture stores have in-store financing options. Large retail stores will commonly do this. They often even allow customers to finance furniture with no interest for a certain time. Depending on their terms, you may be able to pay your furniture off interest-free for the first year or even longer. After that period of time though, the interest rate can be 20% or even higher. Also, note that each store is legally free to set the terms of their own interest rates.
What’s important to understand about furniture financing rates is that they may also have a deferred interest clause. This means that if you don’t pay the entire amount of the furniture off within a certain window of time, then you may end up being charged all of the interest retroactively. For example, if you purchase a couch that has 0% interest for 24 months, your purchase is considered good as cash, saving you interest while on a payment term. However, If you missed paying the whole amount of your purchase within that 24-month period, you may end up paying the all the interest calculated from day one. This is a big financial disaster that most furniture companies and/or their credit providers await!
Unfortunately, not everyone is good at keeping phase with their debts and most people who avail of no-interest furniture financing deals end up paying all the interest, anyway and your furniture company knows this very well.
Keep in mind too that not all financing plans are equal so these scenarios are not always the case. However, this does not mean that financing is still without its risks. Before signing up for any financing plan, always read through the terms and ensure you understand them completely. If you don’t understand what’s included in the financing terms, it’s best to walk away. Again, if you really need to go on debt to purchase furniture, READ THE FINE PRINT!
Advantages of Financing Furniture
Enjoy an Interest-Free Loan
In-store financing isn’t always the worst option. You’ll have to meet the requirements and this isn’t always easy. However, if you do qualify and you’re able to pay off the furniture within the 0% interest rate period, then this may be a reasonable option for you.
If you don’t have enough in savings to cover the cost of the furniture, then you don’t have many other options. This choice is especially challenging if you need furniture promptly. Instead of using your emergency fund, then taking a 0% interest rate loan may be a better choice. However, you’ll want to take a careful look at your budget to determine if you can pay it off before the term is over to avoid high-interest payments. If you’re not sure then it’s best to look for another option.
Enjoy New Furniture Right Away
When you have a financing option on the table, you can go into a store and purchase the items immediately even if you don’t have the cash on hand. This is often seen as desirable when you see a set that you like or are concerned if items are on sale and may not be available for much longer.
The trick with this is that you’ll have to stop yourself from going overboard. If you’re left with a high monthly payment or you aren’t able to pay off the furniture before the promotion period ends, then you’re in trouble. Be careful since it’s easy to spend when you can borrow liberally. Furniture companies won’t do much digging to ensure that you can actually make the monthly interest payments so the responsibility here is on you alone.
Those who don’t have a good or existing credit score may be looking for options to improve their credit. The good news is that a loan of any kind is a method you can use to build credit. Often furniture sellers work with financial institutions and may report their financing to credit bureaus. Check with a store before purchasing before making a decision as this will help you rebuild or build a good credit rating.
The opposite is also true though. You’re only going to be building good credit if you make the payments on time. Missed payments or even late ones can hurt your score. Simply even applying for credit can even temporarily decrease your credit score. Your best option is to ask if the store will offer a soft pull qualification. This allows you to get an idea of whether or not you could be approved for financing without having to have your credit formally checked.
Disadvantages of Financing Furniture
Now that you have a better idea of the potential benefits, we’ve come to the drawbacks. Although not all of these may apply to your situation and scenario, it’s important to be informed of the potential harms for furniture finance.
You May Pay More for the Furniture Compared to When Paid in Cash
If you’re looking at a piece of furniture but it’s out of your price range, it’s a good idea to consider items that are well within your budget but don’t be surprised when a salesperson tries to make that high-priced piece of furniture affordable to you by through a rent to own or a lay-away program, just so you can make that purchase. Higher commissions on the higher-priced furniture motivate snake-oil salespeople to sell them to consumers due to the salesperson’s vested interest, so take caution and only deal with people who strive to help you find the real solution to your problems.
As a side note, as financial advisors in Canada, we strive to provide our clients with honest and transparent service, we help our clients come up with well-informed decisions when it comes to implementing the right insurance and investment solutions for their needs. Click here to learn more…
When offered to finance high-priced furniture, take the time to compute the accumulated amount of your monthly payments to the total price of the furniture when purchased in cash. This will reveal your total monetary outlay on that piece of furniture. You’ll be surprised to learn how much more you’re going to pay than when simply paying cash on furniture.
If it’s a zero-percent financing offer, you may take advantage of it only if you can actually afford to pay off the furniture before the end of the no-interest period, so calculate how much it’s going to cost you to completely pay off the furniture before the interest-free period expires, missing out on this would cost you high interest payment.
If it’s not a 0% interest offer, you may want to consider furniture that is well within your budget. You don’t need the most expensive furniture on the block. Just buy ones that are of good quality and are decently priced. Getting furniture on credit would normally cost you around 120% more compared to its original purchase price.
Financing Increases Impulse Buying
When you pay cash for an item you always have a limitation – the amount of money in your wallet.
Not everything can be purchased with cash though. As a Canadian citizen or resident, we grew accustomed to purchasing high-ticket items on credit. Very rarely would you hear people buying their home and the family car in cash That’s because most Canadians won’t be able to afford these necessities.
Dave Ramsey advises that you pay cash for everything but it may not be practical for most people, if you have a young family for example and you live in Winnipeg, a car may be necessary for your family especially in the winter season.
Similarly, you may not want to wait years before you’re able to save up enough money to purchase your home in cash while all the while, you’re paying $1,100.00 a month on an apartment suite.
The market need of being able to acquire a family home and vehicle brought about the era of financing these big ticket purchases and soon enough, the furniture retail industry caught fast.
Financing furniture you can’t afford is a bad idea! If you can’t afford it, don’t buy it!
Furniture financing motivates impulse purchase of things you don’t really need, less afford.
The monthly payments for furniture financing seem very manageable to most and oftentimes, it is. But, furniture financing may lead people to purchase more expensive furniture than what they can actually afford when paid in cash and it only takes a couple of these to find yourself in a sinkhole.
Before you sign a couple of years of your life tied to furniture financing, consider whether or not you could actually afford the furniture if you were to pay in cash. This simple test would help you walk away from a poor financial decision and save you from a potential financial disaster down the road.
Here’s an anti-impulse buying tip:
If you find yourself “victim” of impulse buying schemes, print the following message and put it inside your wallet where you can see it every time you open it to get your ID to apply for a loan or your credit card to make a quick purchase.
Will I die if I don’t buy this _____________?
Replace the blank with the name of the item you’re about to buy.
If the answer is now, then don’t buy it!
Poor or Minimal Resale Value
When you’re considering financing to acquire an item, it’s a good idea to first gauge if whether or not that item’s value increases over time. Most furniture don’t increase in value, albeit, they tend to depreciate in value over time, just like cars, you always lose money when you try to resell them; this is because consumer items like this have poor or minimal resale value once you take them home from the store.
Financing items that are considered assets per marketplace measure tends to appreciate in value over time, examples of this are collectibles, rare metals, properties and investments increase in value over time.
If you’ve ever seen advertisements for used furniture sold at a fraction of their initial purchase price, that’s how the furniture is priced ones they’re in “used” status, regardless of the period you owned them or their condition. You will never be able to sell them again, once you park them on your living or dining room. The only consolation you’ll get praises from people who don’t really care about your finances whenever they visit your home.
In rare cases, antique furniture will end up gaining value over time if it’s well-maintained. However, this tends to be the exception rather than the rule. Most furniture that you purchase in retail stores isn’t going to live past a time when they’re considered antique.
Financing Furniture May Affect Your Financial Future
When you finance furniture, you’re going to limit what you can spend in other areas of life.
As an economic being, we all operate based on the inflow and outflow of money in our lives, tying up much of your cash flow in “nice to haves” instead of just the necessities will drastically affect your financial future.
Instead of financing expensive furniture, it may be a good idea to put that spending in areas that protect your financial well-being and future. Things that you can’t see but are important in maintaining your financial security in case a life event ever affect your ability to actively work for income. I have written an article on how you can manage your financial risk here.
Another area that you can re-align your furniture spending toward is in financing your financial future, instead of financing expensive furniture, you can finance your future financial independence instead.
A mere $75 a month that you pre-authorize for furniture can mean a lot to your financial freedom when added to your monthly financial freedom fund as it will grow compounded over time. Click here to learn how we work with clients.
Alternatives to Financing Furniture
Now that you have a better understanding of furniture financing, you can better gauge as to whether or not it’s worth it to finance furniture. In some cases, it may actually be beneficial to finance furniture, in most cases though, it’s going to better work in your favor if you leave financing to longer-term investments.
In my 8 years in the financial services industry, I’ve learned that buying anything that’s beyond your budget is and will always be a bad idea, especially if your financing it because aside from the fact that you can no longer afford the initial price of the purchase, you’re actually putting yourself in a situation where you pay for a higher price.
The best alternative to financing furniture is to only buy what you can afford, if paid in cash. If you’re after the credit card points, you can put your purchase through your credit, then pay it off before it’s due, this way you’re not paying hefty credit card interest charges.
There are a lot of decent quality furniture at decent prices, they may not necessarily be your dream furniture but utility-wise, they serve the same purpose.
If you’re after the ambiance of having a great looking furniture, you can hunt deals on gently-used furniture off Facebook Marketplace or Kijiji, they usually sell for half the price.
Another trick I found when trying to get the best deal for an item is to actually Google the item’s name or description; better yet, you can do an image search on Google to find the exact item on compare prices online before finalizing purchase.
If financing is the only option, you can take up no interest for 1 – 24 months offer on furniture that’s well within your budget and pay them off before the offer’s expiration period, and make sure you don’t miss it by setting a calendar reminder. You can also breakdown and preauthorize your payments on a monthly basis. Whatever you do, avoid furniture retail store interest!
Sometimes, people looking into furniture financing are really short on cash, if this is the case, instead of applying for furniture financing, reach out to family and friends first to see if they have any unwanted pieces.
Shopping at local thrift shops is often the best way to get a bargain. Online classifieds and estate sales often have great quality for a small price.
This suggestion may be sensitive to some people due to bug issues, so if buying used furniture off thrift shop and classifieds website isn’t an option you’re considering, you can buy less expensive brand new furniture on sale and pay them in cash.