Interest-free deals can be confusing and costly, even though they have been around for decades. These offers may feel too good to refuse, particularly with longer terms applying to higher levels of finance.
For example, in exchange for five years of interest-free purchases from some retailers, a minimum spend of $1,000 is required.
This seemingly simple condition can turn the necessary purchase of say, a new fridge, into multiple purchases. Those apparently innocent questions such as, “do you need to upgrade your TV?” are really just prompts to encourage more sales.
Having five years to pay off a larger purchase may sound too tempting to pass up, but remember the age-tested maxim “buyer beware.”
‘Interest-free’ is not always as simple as it sounds.
How do these deals make money?
As opposed to 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 as much as 30% per annum!
For example, on a loan of $3,000, you could end up paying as much as an extra $1,000 interest per year! That’s just not smart buying.
Additionally, the credit provider is not obligated to warn that the interest-free period is ending (although some do anyway). It’s up to you to calculate how much you need to pay each month to clear the debt during the interest-free period to avoid paying the interest.
It’s not just interest
It may seem attractive, but having a longer period to pay off purchases will end up costing you more, particularly when it’s for a relatively inexpensive item such as a $1,000 TV. The monthly account-keeping fee adds up considerably over a longer period.
For example – 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 other credit card for the purchase. The card credit limit may be much higher than your initial purchase as a way to encourage you to spend more.
To help curtail additional spending, ask for the card limit to match the full purchase price when completing the application unless you need extra credit. The salesman may explain that you might not be able to increase it later, but take control and stick to your decision.
An annual fee may also be applied to the card, so plan to repay the total balance within the first 12 months and don’t use it for other purchases. Make a note to cancel it before the provider charges another annual fee.
Buying smart
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. Interest can be your friend if managed well. If not, it will be a very expensive enemy.
Managing Your Cash Flow
For more tips on cash flow management, download our free guide: Top 9 Ways to Manage Cash Flow More Effectively.
