It is almost always a bad idea to use credit to purchase jewelry. So much so that I hate to be writing a tutorial on the subject. Most people who are considering buying jewelry on time are young and inexperienced with debt and the effect that it has on their lives. The traps are huge and my first and most unambiguous piece of advice is:
Don’t Do it!
If you insist on ignoring the above advice, There are a few ways to reduce the pain and to avoid the sharks. Here are a few pointers for the benefit of the public.
Many jewelry stores are what the industry calls Credit Jewelers. Stores in and around malls in particular use this model. The idea is simple, you can buy a ring worth $xxx but you don’t really need to come up with the money right now. You can make manageable monthly payments until it’s paid off. If you’ve got a new job but haven’t had a chance to save up much money yet this can seem like a pretty attractive deal. Get a nice ring, get married, advance up the career track, live happily ever after. Besides, you don’t want her (or her friends and relatives) to think you’re cheap.
For starters, understand that you are making two different transactions. You are buying a piece of jewelry and you are borrowing some money. They should be evaluated separately, even if they are happening at the same time and with the same company. Compare the jewelry with similar things offered at other dealers. In addition to the obvious gemological issues, many people put a high value on warranties and guarantees, return and upgrade privileges, the status associated with the jeweler and many other things. This is discussed at length in the tutorial on buying jewelry but don’t let the financing distract you from driving an appropriate bargain, doing your due diligence on the appraisal, etc. The subject here is financing so let’s assume that you’ve narrowed down your shopping to exactly what you want. Now you’re trying to decide how to pay for it.
It’s pretty common for the offered financial arrangements to be pretty attractive because they have inflated the price of the jewelry in the first place. There’s nothing particularly wrong with this as long as you understand what you’re buying and what you’re getting. If a comparable ring elsewhere (or even at that same store) is $1000 less without the financing, then you are paying a $1000 initiation fee for the financing in addition to whatever interest you will pay over the life of the loan. This is the reason for thinking about the two purchases separately. If you can get what you want for a piece of jewelry while paying less for the financing, obviously this is a good plan.
Most jewelry stores that financing jewelry are actually representing a bank or finance company for that portion of your deal. They do this because banks are in a much better position to evaluate their credit risks and to collect from their creditors (you). It’s a very different business from selling jewelry and the jewelers are smart to avoid it. This is being offered to you as a way of making a sale that they may not otherwise be able to make. The banks’ name will appear on the application, usually in the fine print on the back. This is who you are entering a contract with, and make no bones about it: This is a contract. Read it. You are likely to have a relationship with these people for years. After you sign the contract, you take the jewelry, the jewelry store gets paid in full by the bank and the bank gets to collect the payments from you. Pay special attention to the origination fee, the interest rate, and the late payment penalties, It’s common for an introductory period where no interest is charged for several months. Think of this as the opposite of the loan origination fee. It’s easy to figure out what it’s worth. Take the value of the loan times the monthly interest rate times the number of free months.
The usual alternative to in-store financing jewelry is credit card financing. This is actually remarkably similar. They even tend to be the same banks. Even the application and approval process is about the same. The benefit of credit cards is that they have far fewer restrictions on where you make your purchase and they usually have a better interest rate. The only thing you lose is the length of the ‘free’ introductory period. Credit cards usually only give you about 30 days to pay in full before the interest starts. The value of this will depend on the premium you are paying for the jewelry in the first place. It’s unusual for this to be worth more than 2% of the purchase price. Credit cards also offer some level of assurance against fraud by the merchant. Bankrate.com can give you a good comparison view of the cards available.
The popularity of online jewelers has added a new wrinkle to the decision. They usually will accept credit cards but they charge a slightly higher price if you choose to use one. Usually, this premium is about 2% and it covers their fees to the card processing company. Most customers view this as a fee for the insurance more than a fee for the financing but you may wish to make it part of your calculations.
Financing is all about interest. They want it, you don’t. This is the monthly fee charged by the bank for as long as your loan is open, which can be a really long time. This will be described as a percentage per year of the outstanding balance and it’s usually charged monthly. It’s a fee you pay for carrying the loan. The smaller the percentage the better and the faster you pay it the better. Interest can range from 5% to as much as 30% depending on the company chosen and the program selected. That’s why it’s important to pay attention. If you buy a $5000 ring and are planning on making payments for 3 years, this can easily be a $3000 difference in the amount you pay. If you paid an extra $1000 in order to shop at a store that offers to finance, this means you are paying double what you need to!