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How Interest Free Deals Work

written by Shelley Marsh 09/04/2015
Interest free deals

Have you ever wondered how interest free deals work?  On the surface they all sound pretty attractive, who doesn’t want to get what they want now and pay it off interest free over 1, 2 or even 4 years?  Maybe you think it sounds too good to be true?  Well, here are some of the things you should know when considering one of these deals:

  1. Using one of these deals will most likely reduce your ability to negotiate.
    Cash is king when buying big ticket items, generally speaking retailers will not negotiate once they know you require finance. Taking up one of these deals might push you to spend more than you initially expect.
  2. Quite often interest free deals are not available on the cheapest products in each range, this means you might have to end up spending more than you initially thought.
  3. Interest free doesn’t mean fee free. Yes it is true that you are not paying interest for 1, 2 or 4 years on your purchase but you are paying fees and these can add up.  For example, currently advertised is a Harvey Norman 2 year interest free deal. This deal has a $25 establishment fee and $4.95 per month account keeping fee.  On a $500 loan that adds up to $143.80 in fees over the life of the loan or approximately 28% of the initial value of the loan.  On top of that, if you miss a repayment, you will be hit by a $25 late payment fee.
  4. Depending on your deal, your repayments during the period might not pay off the total loan by the time the interest free period ends.  Interest free deals can be structured in several different ways, with a few different parts. Some require a deposit, some don’t.  Some have a minimum monthly repayment, some are equal installments, some require no repayments during the period at all.  Make sure you understand which deal you are signing up for and exactly how it works.  Be warned!  Deals that involve a ‘minimum’ monthly repayment, do not see the whole balance of the loan paid off in full by the time the interest free deal ends.  If you have a remaining balance once the interest free period ends you will be hit with a high interest rate.  Usually around 29%.  To avoid this, instead of making the minimum repayment, calculate how much you need to repay to clear the entire balance and repay that higher amount each month.  For example if you have borrowed $500 over 24 months you need to repay $20.83 per month rather than the much lower minimum payment on your bill, to make sure the balance is cleared by the time the interest free period ends.

We have never tried an interest free deal.  We tend to like to be able to shop around and get the best deal possible on the product we have done our research on.  However, I have had friends who have done interest free deals and have been very happy with the outcome.  So if you are considering one of these deals make sure you understand exactly how the loan works and make sure you stick to the rules otherwise these deals can be costly.  Also watch the fees as these soon add up!

Have you tried an interest free deal?  Were you happy with the outcome?

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The information contained in this post is general in nature and does not constitute financial advice. Please see your financial advisor for advice specific to your individual circumstances

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Jody at Six Little Hearts 10/04/2015 at 8:50 am

Great tips!
We have purchased many large items using interest free, very successfully. We know about the additional fees and always consider them. As long as you maintain your side of the contract, it’s a financially viable way to shop.
Your US holiday sounds fab too! I love NY and was not there in snow but would have loved to have been!

Shelley Marsh 13/04/2015 at 7:48 pm

Hi Jody – I am glad you have used them successfully. I definitely think they are a good option as long as you fully understand the rules as you did 🙂

Grace 10/04/2015 at 4:33 pm

I’m always skeptical of those interest free deals. And I agree with you, cash is king.
People should definitely read the fine print before going into one of these financial commitments.

Shelley Marsh 13/04/2015 at 7:47 pm

I agree Grace – like they say the large print giveth and the fine print taketh away! You always need to read the fine print!

Vanessa 10/04/2015 at 5:26 pm

I’ve never bought an interest free item – I’ve looked at those charges on them and find them a bit expensive.

Shelley Marsh 13/04/2015 at 7:46 pm

Hi Vanessa – yes I agree it is easy to forget the fees but they really do add up!

Jane 26/10/2015 at 5:32 pm

For all those who read my good friend Shelly’s piece on ‘Interest Free Deals’… which was exceptional I might say.
I just like to point out that the NILS loans (The No interest Loan scheme) is a vastly different animal from the type Shelly refers to.
NILS are completely free of interest, fees or charges of any kind….in fact no catches at all!
Hard to believe I hear you saying. Well the difference is that the NILS program is a community loan scheme backed by government. It typically offers small loans (up to $1200) to people on low incomes. Typically its for people who dont have access to mainstream financial services. For example. Single parent on a pensions’ fridge breaks down. $1000 is often a stretch as people in this circumstance are unlikely to have $1000 sitting around.
Their choices then become limited to 1. Centrelink advance…not always easy to get and might not provide enough money to buy a suitable fridge. 2. Pay day lenders. Despite the temptations of clever advertising coupled with a suite of the latest technology that enables one to press a button on an app leading to $1000 deposit in the bank within 24hours. STAY WELL AWAY from these! These loans have so many traps Indiana Jones would struggle to navigate around them! I might add these loans is a significant cause to spiralling poverty all over the country. So also keep in mind that ethics sits pretty low on the ladder for these organisations.
Would you like to know more check out nilsnswfindascheme.org.au is see if you’re eligable or contact me directly
Cheers Jane


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