"Same as Cash" deals are not what they claim to be

My wife and I bought a couch this weekend. It’s a fairly big couch – an L-shaped, two-piece beauty. It’s not the most expensive piece of furniture in the world, but it’s not the least expensive either. No worries, though - the retailer offers 60 months “same-as-cash” through a credit offer. As long as I pay each month on time, the cost to me is the cost of the sticker price of the couch divided by 60. The bill? It works out to less than $70 a month.

Many companies use the same-as-cash option to draw shoppers in. But “same-as-cash” is almost always a misnomer. In reality, your purchase is “same-as-credit” because there is an interest rate built into the price. When I bought that couch , do you suppose the maker of the couch (a company in North Carolina) allows the retailer to pay them over five years? I doubt it. That would require the furniture maker to ask their suppliers – fabric makers, lumber suppliers, foam distributors – to also take payment in the same manner. The cascading of such an ask down the supply chain would be met with resounding, “We’ll look for another customer, thanks.”

If the store doesn’t ask their supplier to take the same terms they give their customers, how do they pay them? In all likelihood, the retailer borrows money from its bank to pay the furniture maker in full within 30-120 days of delivery, even though I might take five years to pay the retailer back. But the bank isn’t going to give the store that money for free – they will charge interest. That’s how banks (and credit-issuing companies of all kinds) make their money after all.

To illustrate: assume the store can buy the couch from their vendor in North Carolina for $2,000. They borrow that amount from their bank to pay the maker of the couch in one to three months after delivery. The store then pays their bank every time I pay them – in monthly installments over five years with interest. Assume that interest amounts to $200 over the life of the loan. Suddenly, that $2,000 couch is now costing the store $2,200. But they aren't really paying that interest. I am. They pass that cost on to me. And that’s not the only cost they’re passing through. This is because if I only pay for the value of the payment to the supplier and the value of the interest to their bank, then the retailer won’t make any money. They therefore need to make sure the price of the furniture to me is equal to the cost of the couch from their supplier plus the interest they’ll have to pay their bank plus any margin they hope to make off of the sale to me plus the value of any interest they would have earned on that margin if they were paid immediately. So now our $2,200 price might go to $2,500 or more and our deal isn’t “same-as-cash.” It’s “same-as-cash-plus-the-bank’s-interest-plus-Jordan’s-margin-plus-the-value-of-interest-on-the-margin-if-payment-were-in-full-today.”

In days long since gone, I found that I could offer retailers (even some of the big-box ones) cash on the spot for a discount. The logic was that if I’m willing to give the store the cash for the couch now, all those extra costs that come with a financing deal could be shaved off the price. But in a world where even local managers don’t have the authority to approve deviations from established processes, it has gotten harder and harder to get stores to agree to such an offer. 

So, in the end, I took the “same-as-cash” deal and will probably pay off the couch well before I’m required too (even though logic would say I shouldn’t), just so I can feel as though I’m not getting a raw deal. It stinks to know I’m spending a bit more money even though I didn’t want to, but in a world where monthly payments rule it’s getting harder to avoid.  

(Note: the flow of funds may work differently than described here - for example the credit card issuer could effectively be acting as a bank for the store - but the principle remains. There is no "free money.")