Your money: Free money comes at a cost

I recently came across some interesting facts and figures about interest-free credit. Typically you see this type of credit advertised by appliance stores and furniture companies.

As it happens about 12 percent of those who take out this type of free credit don’t pay it back at the end of the term, so we thought we would ask a major appliance retailer offering up to “60 months interest-free” what the terms were. Here are some of the details.

• Essentially this retailer finances it through a visa card facility. According to their website, the 60 months interest-free deal applies on purchases greater than $1,200. The loan balance may be repaid at any time during the interest-free period.
• If there is a balance still to pay at the end of the interest-free period, the balance attracts interest at a rate of 29.95% per annum!
• There is an establishment fee of $55. This applies to all interest-free arrangements.
• There is an annual credit card fee of $52.
• Minimum monthly payments must be made during the interest-free period. This is 3% of the outstanding balance or $20 – whichever is the greater. If the minimum is not paid, the loan is taken to be in default and will attract interest.

I don’t like these deals for a number of reasons.

Firstly, it removes your ability to haggle for a cheaper price at the time of the purchase. I think negotiating a 10% discount is easy and sometimes it’s possible to gain significantly more.

Second, paying later means a shopper is likely to spend more.

Thirdly, circumstances may change for the worse and you may find yourself unable to pay the balance at the end of the interest-free term or worse, even the minimum payments, and then you will get whacked with what are very high interest rates.

And lastly, although interest may not be charged, the deal is not cost-free as there are other charges. In the example above the $52 annual fee alone is 4.3% of the $1,200, and that does not take into account the $55 establishment fee.

The truth is, many people lack the discipline to save the money needed to repay the debt when it becomes due. It just gets forgotten, and they end up paying through the nose – which is how finance companies recover the interest they miss out on during the interest-free period.

The reality is that the best way to buy appliances is in full on the spot – after negotiating a decent discount on the purchase.


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