Feature: Interest Free Deals

Helpful advice from ASIC on the pitfalls of interest free deals

Interest-free deals - Take an interest in your deal

Many stores offer interest-free deals that let you take goods home before you pay for them. But interest-free doesn’t mean cost-free – there are hidden fees and charges that could trip you up.

Is an interest-free deal the best option?

How interest-free deals work

Most large stores offer interest-free deals for things like computers, electrical appliances, lounge suites and other household goods.

There are usually two ways you can pay for interest-free deals:

• Payment by instalments – you make regular payments each month, with the aim of paying off your purchase by the end of the interest-free period
• Buy now, pay later – you don’t make any payments until the end of the interest-free period, at which time you pay the full amount, plus fees and charges. You may also have to pay a deposit upfront.

Different retailers offer different deals, so make sure you know exactly what you’re being offered. There may be a few hidden traps so read your credit contract and ask questions if you don’t understand something.

Case study: Maya wasn't tempted to buy more than she needed

• Maya and her husband Con went shopping for a new fridge and dishwasher and decided that an interest-free deal would be good for them. After renovating, they didn’t have enough cash to pay for the goods. Con also wanted to get a new plasma TV and home theatre, and the salesman said they could bundle it together in the one deal. But when Maya asked what would happen if they didn’t pay everything off within the interest-free period, she was shocked at how much it would cost.
• The store would charge them nearly 30% interest on the outstanding amount. 'There was no way we could afford to risk that on top of our mortgage,' she says. 'So we only got the kitchen stuff on the interest-free deal. We’re paying more than the minimum monthly amount to make sure we pay it off in time. And my husband will just have to wait until we’ve saved up to get a new TV!'

Things to watch out for

Make sure you can afford it. Don’t rely on the retailer or credit provider to tell you whether you can afford the interest-free deal. Use a personal loan calculator to work out how much you will need to repay each month to pay the loan off in full, on time.

Only sign up if you are confident you can afford the repayments.

Watch out for the end of the interest-free period

Your credit provider does not have to remind you when the interest-free period is due to run out. You must keep track of the date yourself. If you don’t pay back the full amount of your purchase by the end of the interest-free period, your credit provider will start charging you interest. The interest rate could be up to 30% so always aim to repay your debt early. Pay more towards your debt if you can

If you’re paying by instalment, the minimum monthly payments suggested by the retailer are often not enough to pay off the full purchase price before the interest-free period runs out. Minimum monthly payments are calculated either as a minimum dollar amount, or a percentage of the total amount owing. Do your own sums and work out what you actually need to pay each month to repay the full amount by the end of the interest-free period. It’s probably going to be more than the minimum amount suggested by the lender.

If you agree to the minimum repayments without checking first, you may be left with a large outstanding amount to pay at the end of the interest-free period. If you can’t pay this in full, you will be charged a higher than average interest rate on your debt.

Smart tip

Check your credit contract to see if you can make more than the minimum monthly payments. Some deals don’t let you do this, so even if you wanted to pay out the deal early and get the debt out of the way, you won’t be able to.

Check fees and charges

Even when an ad says ‘no deposit, no interest, nothing to pay today’, in most cases you will still have to pay fees. For example, you may have to pay an establishment fee ($25), a monthly service fee ($5) and a late payment fee ($35). Let’s say you sign up for an interest-free deal over 4 years. At $5 a month, the service fee alone will cost you $240. Before you sign anything, ask about all the fees and charges so you can factor them in when you work out your monthly repayments.

Beware of store cards

Store cards usually have higher interest rates than regular credit cards. Also, any purchases you make with the card will not attract the interest-free terms you signed up for. The card will often have a credit limit that’s higher than the value of your interest-free purchase. Ask for the limit to be lowered to the amount of the debt (that is, the full purchase price).

If you are given a store card, check the interest rate and fees before using it. Even better, compare the interest rate on your credit card with that of the store card. Chances are it will be cheaper to use a regular credit card than the store card.

Sometimes a retailer will give you a store card with your interest-free deal. You may be tempted to use it to buy more goods on credit, but this is not a good idea.

Smart tip

Write to the credit provider to cancel the store card once you have paid off the interest-free deal. Then you won’t be tempted to use it for more purchases.

Read your credit contract

The terms and conditions of an interest-free deal can be complicated. For example, you may be charged account-keeping fees and penalties if you miss repayments, break the agreement or pay it off early. Make sure you check the terms and conditions of the deal. See credit contract for more information.

Stay out of debt

If you have trouble making repayments, contact your credit provider straight away to discuss your options.

See trouble with debt.

Is an interest-free deal the best option?

Interest-free deals can encourage you to buy things you want rather than need. Don’t feel pressured to sign up by a pushy salesperson or an offer that seems like a good deal. Explore all your purchasing options first. You may be better off saving up to buy the item instead.

If you are on a low income and don’t have the cash to pay for an essential item upfront, you may be eligible for a no or low interest loan.

Consider lay-by

With lay-by, you pay off your purchase in instalments. You will have to wait until you’ve paid it off in full before taking your item home, but you will save money in fees and interest. If you still want to go interest-free, shop around for the best price on the goods and the best terms on the deal. While interest-free deals may seem appealing in the short term, always consider the longer-term costs. Pay off your purchase in full by the end of the interest-free period to avoid being slugged with extra interest and fees.

This article reproduced with permission of ASIC. Source: MoneySmart website, http://www.moneysmart.gov.au, 23 August 2011.