They have been around for decades but interest-free deals can still be confusing and costly when not managed correctly.
Excitable advertising can make these offers almost too good to refuse, particularly with longer terms applying to higher levels of finance. For example, to get five years’ interest-free on purchases from some retailers, the minimum spend is $1,000. This simple condition could turn a necessary purchase of say, a new fridge, into a multiple purchase prompted by the seemingly innocent question, “do you need to upgrade your TV?”.
Five years up your sleeve to pay off a larger purchase may sound too tempting to pass up but never forget the age-tested maxim “buyer beware”. In the case of interest-free it’s not always as simple as it sounds.
How do these deals make money?
Not to be confused with the newer “buy now, pay later” products where no interest is ever charged, interest-free deals simply defer the interest to the end of the promotional period and then it appears with guns blazing! Interest will be charged on any outstanding amount at ridiculously high levels, often close to 30% per annum.
For instance, if you had a loan of $3,000, how would you feel about paying an extra $1,000 interest per year? That’s not smart buying.
Although some do, the credit provider is not obligated to warn that the interest-free period is ending. It’s up to you to calculate the monthly repayments to clear the debt during the interest-free period and pay that amount - or more if you can.
It’s not just interest
It may seem attractive, but having a longer period to pay off a purchase will cost you more, particularly when it’s for a relatively inexpensive item, eg. a $1,000 TV. The monthly account-keeping fee will add up considerably over a longer period. Five years (60 months) at $5.95 is an extra $357 in fees. Reducing the period of the loan will save you money on these fees. There are also late payment fees if you miss the monthly due date.
As part of the deal, you will usually be provided with a store card or another credit card for this purchase. The card credit limit may be much higher than your initial purchase as a way to encourage you to spend more, so if you don’t need the extra credit ask for the card limit to match the full purchase price when completing the application. The salesman may explain that you might not be able to increase it later, but take control and stick to your decision.
The card could also have an annual fee so if you repay the total balance within the first 12 months and don’t plan to use it for another purchase make a note to cancel it before the provider charges another annual fee.
If you intend to buy using an interest-free offer, check your budget and make sure you can repay the entire purchase price (plus fees) before the expiry of the interest-free period. Managed well, interest will be your friend. If not, it will be a very expensive enemy.
Further Reading: ASIC’s MoneySmart website www.moneysmart.gov.au Interest-free deals