Personal loan vs. the store’s no-interest loan for furniture

Coming up with the cash to pay for new furniture can feel like a daunting task. Fortunately, many furniture stores offer in-store financing options that give customers the option of paying for new furniture over time.

A second option is to take out a personal loan, which typically have a lower interest rate than the financing offered through a furniture store.

How furniture financing works

Furniture financing involves taking out a loan to cover the purchase price of the new furniture. With furniture loans, you don’t have to cover the full price of the furniture when you take it home. Instead, you can stretch out the payments over time.

The two most common methods of financing your furniture are personal loans and in-store financing.

There generally aren’t any restrictions on how you can use the proceeds from a personal loan. For example, if you’re approved for $10,000 and your furniture costs $7,000, you’re free to use the remaining $3,000 as you choose.

If you use the store’s in-house financing, the loan is automatically used to cover the purchase price of your new furniture and you don’t receive any funds directly.

No-interest loan in-store

When a store advertises 0 percent interest rates, the loan isn’t interest free. An interest rate is attached to the loan, but payment on the interest is waived if you follow the terms of the financing to the letter.

This means you must make your monthly payments on time and pay off the loan within the promotional period, usually between six months and three years. If you miss a payment or you don’t pay off the loan in time, you will be charged for all the deferred interest that was previously waived. The interest rates for this type of loan can be as high as 29.99 percent.

Benefits

• Potentially interest free: The ability to finance a costly furniture purchase without paying interest is the main benefit. Though it is contingent on you staying current on your payments and paying off the balance within the promotional period.

• Looser credit requirements: You may not need good credit to qualify. Since the financing is secured by using the furniture as collateral, the store may approve you for a loan even if you have a low credit score.

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Drawbacks

• May not be interest free: Interest is retroactively applied if you don’t pay the balance in full before the promotional period ends or if you make a late payment. Interest would be calculated from the day of purchase and added to the outstanding balance.

• High interest rates: Since this type of financing is often used by borrowers with low credit scores who may not be able to get approved elsewhere, interest rates could reach 25 percent or higher if you miss a payment or don’t meet the terms.

Personal loan

Personal loans are debt products you can get through traditional banks, credit unions and private lenders. If approved, you’ll receive the funds in a lump sum that you can use however you’d like.

You’ll repay what you owe in equal monthly installments over a set period of time, typically between two and five years. While not exclusively for furniture financing, personal loans could be beneficial for a few reasons.

You may want to get prequalified before you start shopping so you’ll know in advance the loan amount and interest rates you could qualify for. This prequalification will not hurt your credit score.

Benefits

• Lower interest rate: If you have a good credit score, the interest rate you’re charged on a personal loan will typically be less than the interest rate offered by the furniture store.

• More spending options: Since you receive the funds in a lump sum, you can purchase your furniture from several stores.

• No collateral required: The furniture you’re purchasing is not used to secure the loan. If you default on the loan, it’s unlikely you’d lose the furniture.

Drawbacks

• Interest begins immediately: Unlike the furniture store where you’re only charged interest if you don’t meet the terms, the interest on a personal loan starts as soon as you receive the funds.

• Origination fees: Most lenders charge a fee to create your loan. You may have to either have it added to the cost of your loan or have it deducted from the funds you receive from the loan.

• Tougher eligibility requirements: People with poor credit scores may not qualify for a personal loan.

How to find the best financing deal

After purchasing a home and car, furnishing a home is one of the most expensive costs most people have. By researching your financing options in advance, you may be able to discover the best way to pay for your new furniture.

1. Weigh the pros and cons of in-store financing versus a personal loan. Calculate what your monthly payments would be with each method and make sure your monthly budget will accommodate that.

2. Factor in the fees for a personal loan and the amount of interest that will be added to the balance of in-store financing if you miss a payment or don’t pay it off in time.

3. Don’t settle for the first in-store financing or personal loan opportunity that comes your way. Check the options available at other stores and with other lenders to see if you can find a better offer.

4. Find a retailer that offers a program with an extended promotional period if you go with in-store financing. This way you have enough time to eliminate the balance before the interest kicks in.

5. Explore bad credit loan options if you don’t have good credit. Some lenders may offer more competitive interest rates and lower fees than in-store financing options.

Other ways to pay for furniture

Using in-store financing or personal loans aren’t the only options to pay for furniture.

• Buy now, pay later (BNPL): Services like Affirm and Uplift partner with a lot of retailers to offer payment plans. Some BNPL plans have no interest, while others include interest, but don’t have late or surprise fees.

• Credit card: You may be able to use a credit card that offers a 0 percent interest rate for a set time. If you haven’t paid off the balance after the promotional period, you’ll be charged interest on the remaining amount. Unlike in-store financing, the interest is not applied retroactively.

• Home equity loan: If you own your home and have enough equity in it, you may be able to qualify for a home equity loan. These loans are secured by your house and typically have a lower interest rate than personal loans.

• Rent-to-own: This is another option for people with poor credit. You pay a rental price for the furniture until you pay it off. However, the interest rate with this method is typically high.

• In-store layaway: While there’s often a fee to use this service, you typically don’t pay financing fees. However, you can’t take the furniture home until you’ve paid it off in full.

• Shop secondhand: Thrift stores and consignment shops often have gently used furniture for a much lower price than brand new pieces.

• Borrow money from friends: Borrowing from a family member or friend can truly be an interest-free option. Just make sure you both agree to a payment plan, so you don’t harm your relationship.

• Wait: Getting new furniture can be great, but if it puts you in financial jeopardy, consider waiting until you have enough money to pay for it in full. Creating a budget for the purchase will pay off in the future.

Bottom line

Buying furniture can be expensive. Having the option to make monthly payments could ease the strain on your budget and personal loans and in-store financing are two great ways to do this.

Before heading out to the furniture store, research all your options to choose the best payment method for your financial situation.