A:

When an advertisement says "financing", it means that the seller is going to give you a loan on an item that you purchase. Making use of seller financing means that you're buying on credit. You do not have to pay for the item on the spot, but you are billed periodically by the seller for a portion of the cost plus interest charges. Consumers commonly use financing when purchasing more expensive items like rings, cars and furniture. An important point to note is that when advertisers advertise financing, the interest rate that they quote is not necessarily the one that applies to you. Sometimes, the interest rate is affected by your geographical location, credit history, term of loan and the condition of the item being purchased. Generally, new items are less expensive to finance (lower interest rates) than used items.

There are pros and cons to using the seller's financing program. The pros are that it's often fast, convenient and competitive, and if you do not meet the rigid requirements of traditional lenders, there is a good chance that you can obtain financing from a seller. The cons associated with seller financing are that there are sometimes higher interest rates and down payment requirements than what you would receive from traditional lending institutions. (Learn more about building a good credit history so that you can get the best rates from your bank or your retailer. Read our related article How To Establish A Credit History.)

If you have to take out a loan to make a purchase, there are other options. You can go to your bank, your local credit union or family and friends. The upside to using a bank is that you may already have a relationship with the bank and the rates are competitive.

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