The real cost of interest free deals
Interest free deals can seem like a great idea, after all, you get to take your items home straight away, while paying them off over a year or two. But do you know the real cost of interest free deals? There are hidden charges to be aware of, and chances are your purchase will end up costing you way more than if you had paid cash.
What is interest free
Many of the big furniture and electrical retailers regularly offer interest free deals. You take your items home immediately and then pay them off over a pre determined number of months. Usually you will pay a deposit, but occasionally interest free deals will also be no deposit deals.
Why you pay more
When you buy big tickets items do you usually negotiate on the price? We sure do! When you ask for the retailers best price, the salesperson will usually ask if you will be paying cash. This is because you will always get much bigger discounts when paying cash, with there usually being no discount when you purchase using finance. So straight up, you are in front by paying cash, which does also refer to credit cards in sales person speak.
The fees and charges
Interest free doesn’t mean fee free. In the fine print there will be an account establishment fee, because what you are effectively doing is opening an account with continuous access to credit, and a monthly fee. These fees can add up to a considerable amount over the interest fee period, meaning you really are paying interest, just in the form of ‘fees’ rather than ‘interest’.
An example in a current Harvey Norman catalogue is 18 months interest free on air conditioners. In the fine print, the details are:
Minimum purchase – $500
Establishment fee – $25
Monthly fee – $4.95
Based on the above amount, over the 18 months you will pay $114.10 in fees, which if you purchase a $500 air conditioner is over 20% the initial purchase price. That’s a huge amount in fees, and is effectively the same as paying 15.2%pa interest on your purchase. You could get a far lower rate by using a low interest credit card.
Of course if you don’t pay the amount off in full by the end of the 18 months, you will then be hit with an interest rate of 29.49%. This is where the finance company will get you, the minimum repayments will always be less than you actually need to be making in order to pay the amount of in full by the end of 18 months. As soon as you start the finance period, divide the amount you owe by the loan term in months and pay that amount every month. So in this case, you need to pay $27.78 each month to get the finance paid off in full within 18 months.
As you can see by the above example, interest free finance is definitely not fee free. It’s best to stick by the saying – if you can’t afford to pay cash, you can’t afford the item!