I was making about $500 in purchases from Home Depot this weekend and I noticed during checkout there was an interest free for six months option through Paypal Credit. I read through the terms and conditions, and although Paypal Credit was honest and straightforward about how it worked, what I found scared me.
I elected to pay with discounted gift cards and saved myself about 8%. But, if you are considering paying for anything with a special offer from Paypal Credit please read on before doing so, because if you don’t know how it works you will pay big time.
How it works
The program was called “No Interest if Paid in Full” for six months which is very different than No Interest for six months. The “Paid in Full” is the gotcha that could cost you a lot of money.
According to the terms and credits, you will not have to pay interest for six months. However, that interest will keep accruing for the whole six months and builds up higher and higher in what they called deferred interest.
In six months, there is a deadline that Paypal Credit calls the End Date which is the key to the whole program. If you pay every cent of what you owe them before the end date then give yourself a big high five. You have avoided the trap and gotten yourself six months worth of interest free financing.
If your entire balance is not paid down to zero then WAMMMM! The trap springs on you and you are hit with huge interest fees. Not only do you have to pay interest of 20% (?!!!?) going forward after the end date, but you also have to pay the deferred interest that accrued for the last six months. That means they basically turn back the clock and make it so you weren’t getting 0% interest that whole time, you were paying the ridiculously high rate of 20%. Please, please, please, please, please don’t do that. Nobody can afford 20% interest, it is way to expensive.
How much it could cost you
To see how bad it is, lets look at my purchases of about $500. Lets imagine that I took the no interest if paid in full option and made just the minimum payments of $25 for the first five months. At that point I would have made 4 payments to reduce my balance to $400 with accrued deferred interest of about $44.
Option A is I could pay off that $400 balance before my end date and the accrued deferred interest dissappears. Poof! I pay no interest, which is a great deal.
Option B is that I don’t pay the $400 off before the end date, and make one more minimum payment of $25 before paying off the remaining balance. At the end date I am suddenly charged the deferred interest $44 plus another $6 for the next months interest.
That is a charge of $50 for paying my balance off 1 month later. $50 in interest in one month on a balance of $400 is an effective annualized interest rate of 150% in a single month! (By this I mean you effectively pay 0% in months 1-5 then 150% in the sixth month. Nobody can afford to pay that kind of interest rate!
If you take advantage of the Paypal Credit No Interest if Paid in Full Deal, then you absolutely must make sure that you pay in full to get the no interest, otherwise you get charged with huge interest fees.
A great way to prevent this is to immediately schedule a full payment in your internet banking to be paid well before the end date if your bank allows you to schedule payments this far in advance. If your bank doesn’t allow this, then set up a reminder on your calendar so you won’t forget.