Interest Rates on Purchases

Today, somehow, we got on the conversation of the BowFlex.  Don’t ask how, we somehow got to it by means of Chuck Norris.  Anyways, a guy at work here saw an infomercial one night about the new BowFlex Revolution.  Anyways, I was looking at them and noticed the “low low monthly payments”.  However, after seeing the total cost, it seemed awfully strange.

Digging a little deeper revealed that in addition to $2500, you have to spend $200 to have it shipped to you.  Ok, so total is up to $2700, but we’re only paying $37 a month.  A little math later, we get that annual payment is $444.  However, Bowflex isn’t nice enough to give it to us for no interest penalty, oh no.  Instead, they give us an awesome 12 month fixed rate promotion of 16.99%.  Such a deal.  So, the first year’s interest is $458.73.  So, by paying the minimum monthly payment, you actually don’t make back the interest.  You’re, in fact, in the hole the initial purchase plus $14.73, and you’re a year into it, and I’m sure not using the damn thing anymore.

Let’s fast forward to the end of year two.  You’ve payed BowFlex $888. So, if this was an interest free purchase, you would still owe $1812, which isn’t too bad.  But now you figure in the first years interest, which is the above $458.73, plus the second years interest (based on $2714.73 and a standard rate of 21.8%), which is $591.81.  All the sudden, you’re in the hole the initial purchase plus $162.54.  Ok, but lets say you forgot to make a payment, or didn’t pay the “low low low monthly price” one month.  That means your interest rate jumps to 25.8% (WOW!), so now you’re in the hole the initial purchase plus $271.13. 

As you can see, it just spirals out of control, since you have never actually paid back any of the interest AND take a chunk out of the principle.  With these interest rates and the required low monthly payment, you can never actually pay it off.  I guess that’s one way to make money, eh? 

Now, I’m not saying this is the company’s fault, far from it.  And yes, I know my math isn’t perfect, but it’s close enough based on the amount of interest and the monthly payments.  It just shows you how easily it is to get suckered into a “deal”.