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:
- 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.
- 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.
- 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.
- 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