What is the true cost of purchasing something with credit?

When Adelle was shopping around for a new washer and dryer, an advertisement caught her eye: “Buy now for only $28 a month!”

“ Wow, this sure looks like a deal,” Adelle thought. “I can handle that kind of monthly payment. And all that money I’ve saved to pay for the washer and dryer in full—why, I can use that for new curtains, and oh, that old coffee maker just makes me nutty every time I use it, and...” Adelle’s head was spinning. Fortunately, she showed the advertisement flyer to her mentor, Leota. She read the small print, grabbed a calculator, and sat Adelle down.

If Adelle were to sign up for this $28-a-month “deal” to buy her appliances, she would pay close to an additional $200 in interest! What would be the true cost of Adelle’s purchase? • Cost of washer and dryer: $475 • Interest for two years: $199.50 • Total cost of the purchase: $674.50

Here is what Leota helped Adelle calculate:
• Cost of washer and dryer on sale: $475
• Advertised monthly payment: $28
• Loan term: 24 months (2 years)
• Annual percentage rate (APR): 21%
• $475 x 21% = $99.75 of interest (each year)
• (calculation: 475 x .21 = 99.75)
• $99.75 x 2 (years) = $199.50 of interest for two years

What do you think Leota told Adelle?

You probably answered, “Pay for the purchase in full and save $199.50.”

As you shop around for credit, keep this in mind: Advertised low monthly payments are low for two reasons. Lenders know what monthly payment you’ll find attractive. They also know you might not take time to read the small print that lists extra fees. Those fees make lenders a lot of money—money you could put toward your financial goals.

Adelle decided to stick with her original plan: Pay for the washer and dryer in full. She also decided on some other things:
1	Always read the small print on any credit offer.
2	Look for the APR, or annual percentage rate, charged to maintain a balance. Use it to calculate the true cost of a purchase.
3	Read the small print of terms and conditions. Look for extra costs of credit, such as late payment fees and the right to charge a higher APR after a late payment.
4	If the APR is low, find out how long it is available. For the full length of the loan? Or, for just a few months?
5	Always ask for help reading the small print and making calculations if needed.