Interest-free financing on pricey electronics: Beware the pitfalls

Early this morning, I got an e-mail from Amazon letting me know that the retailer is offering, for a limited time, 24-month interest-free financing when you purchase a qualifying HDTV using an Amazon.com store card.

The e-mail reminded my that while interest-free deals can be helpful for those who'd like to spread their payments over the course of several months, these types of deals aren't without their pitfalls.

The Amazon free-financing offer is good on certain TV models from LG, Panasonic, Samsung, and Toshiba sets.To take advantage of it, you need to apply online for an Amazon.com store card and receive credit approval (which often takes less than a minute). If approved, your Amazon store card becomes a payment option during checkout. You then select the set you want from the list of qualifying TVs, add it to your cart, and choose the Amazon store-card payment option. Just pay off the balance within 24 months, and you've got a pretty good deal, right? The Consumerist has an interesting story on how you could turn this type of financing offer into the equivalent of an interest-free loan—as long as you have the cash already on hand.

Yes—as long as you do pay in full before the 24-month period expires and make any required minimum monthly payments. Because if you don't, the fine print in the deal reveals that interest on the full purchase amount will be back-dated to the original day you bought the set. That means that even if you owed only $25 on a $2,000 TV when the 24-month period expired, you're responsible for paying two years of interest on $2,000.

The other kicker: A current interest rate of 26 percent, which could climb even higher if the prime rate rises. Paying 26-percent interest for two years on a $2,000 TV could make this a very expensive "deal," especially at a time when we see TV prices dropping by double-digit percentages every year.

Amazon's terms aren't unique among retailers; this is exactly how almost all free-financing deals work. Our advice is that if you choose to take advantage of a free-financing promotion, don't play chicken with the deadline—pay it off a month or two earlier than the terms call for. With just the amount of money you'd have to pay if the interest kicks in, you could buy a new 42-inch plasma and Blu-ray player.

—James K.Willcox