There have lots of blog posts and articles about 0% balance transfer credit card deals and arbitrage. In the real estate, zero downpayment is a buzzword. Also hot not so recently was the interest only deal financing. The mainstream press has written a lot of negative articles on these teaser financing techniques, especially with regards to the interest only loans. The fact of the matter is that many people have gotten into financial troubles because of these deals. I know people who got carried away with 0% apr credit card deals and ended up with massive credit card debt. I also know people who bought properties in the last 2 years on interest only or adjustable mortgages and are now feeling the pain.

The truth of the matter of all these deals is that they are best taken advantage of if you do not really need them. Below are a few examples of friends of mine (not their real names) who have wisely taken advantage of these deals. Notice how different they are compared to others who have gotten into trouble because of these teaser deals.

Example 1 : Billy - Using 0% credit card deals for his home improvement

Rather than take out a home equity line of credit or a home improvement loan, Billy decided to get a 0% apr balance transfer deal for 12 months. He got a $15,000 credit line, which he used to furnish his basement and some other kitchen works. He could have easily paid by check or cash. But he decided to stretch out his payment over 12 months.

Example 2 : John got 0% financing with a credit card on his plasma purchase

John wanted to get the latest Panasonic Plasma. I went to Best Buy with him and helped him choose a model. But before he decided on the model, John had just got approval for the Discover® Platinum Card, which gave him a 0% apr rate for 12 months on purchases and balance transfer. He got the latest model for about $2700 (thereabouts) and instead of paying up front, he got 0% financing from his Discover card. But unlike most people who use these deals to buy stuff they really shouldn’t be buying, John can easily pay off the Plasma TV in cash. But he simple chose not to do so.

Example 3 : Jack Bought His House with No Money Down

How is this possible? You might ask. Well, Jack did not use any of the shaddy techniques that are thought in real estate courses. Instead, what Jack has a large portfolio (nearly 7 figures) with Salomon Smith Barney. Most major brokerage firms will give you a mortgage with no money down if you pledge your “securities” as a colleteral. The value of the house he bought was way below the value of his portfolio. He could have paid it off in cash if he wanted. But since he did not want to touch his retirement portfolio, he decided to take advantage of the no downpayment deal.

Example 4: Mary has an interest only mortgage

Huh! We all thought interest only mortgage was bad because it induced people who really could afford the house to buy them. Years later, they will have a higher principal outstanding compared to if they had taken a conventional 30 year fixed mortgage. However, Mary isn’t someone who had to stretch to buy her house. Like John, she can pay off her house if she had wanted to. Instead, she is using the money she is saving from the lower interest payment to invest for both herself and her kids college education. She figured she the returns of her investment over 10 years will be more than the cost of her mortgage. If things go sour, she is not in trouble at all.

If You Need Cheap Financing For Your Purchase, then You Probably Should Not Be Getting It

Notice what my four “successful friends” have in common. They could all easily have paid up for their purchases, but instead took advantage of favourable financing when they were available to “stretch their dollars”. They are different from those who actually should not be buying what they buy and only do because these cheap financing were available. I guess the lesson is that if you are wealthy, more cheap financing is available to you and perhaps you should take advantage of it. But if you can only afford these high price items because of cheap financing, then perhaps you should reconsider!.

This entry was posted on Friday, March 2nd, 2007 at 3:42 am and is filed under Opinions, Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.