Lately I have spoken to a few different people regarding interest free finance. And it seems that a lot of people are getting burnt by these 'deals', with most not completely understanding how interest-free works, usually glossing over the fine print (let’s be honest, nobody has time to read all 27 jargon filled pages!). So I thought I might lay a few truths down and hopefully shed some light on how interest-free really works.
I get it, people want to buy stuff, and people want to buy stuff NOW. But most of us don’t have enough money in our pockets to outlay immediately. Then an advert pops up while you’re in the middle of dinner, “Zero deposit, NO INTEREST FOR 36 MONTHS!” What a bargain, sounds like a great deal. And sometimes it might be, if you understand how it works.
Interest Free finance is a loan. Yep, just like a credit card. You complete a credit application and the finance company will access your credit file to assess your application. Approved or declined, this inquiry will pop up on your credit history (FYI - the more inquiries, the less attractive your credit history looks).
Before jumping into an interest-free deal you need to understand - If you only pay the minimum monthly repayment YOU WILL NOT PAY OFF YOUR BALANCE IN FULL within the interest-free period. And if you make ZERO repayments, you will now have to pay interest on the WHOLE BALANCE. This is what catches most people out. Hearing that you can get a whole house of furniture or take a trip to Europe for as little as $45 a month is pretty amazing. Let alone $0! But it really is just a sneaky little trick. Any outstanding balance at the end of the interest free period will attract huge interest charges. And I am not talking 8%, think 20-30%. My purse winces at the thought. In addition, the interest rate you'll be charged if you miss a payment can be just as high. So keep that in mind.
To avoid these traps, I have come up with some tips to make the most of an interest-free deal:
1. Work out your repayments - Only use an interest-free deal if the contract allows you to pay more than the minimum monthly amount. Pay it off before at least one month before the interest free period is up!
2. Make sure you read the contract and understand ALL the fees and charges for the entire term of the deal. Even when an ad says 'no deposit, no interest, nothing to pay', you may still have to pay fees. Many of these deals have costly establishment fees, payment processing fees and monthly account fees. Really weigh up whether it is worth it or not.
3. If you can't afford the repayments required to pay it off within the interest-free period, don't take the deal! Period.
4. Do not apply for interest-free finance if you think your application will be declined – every time you apply for credit your record ticks an inquiry and the more inquiries you have, the less attractive your credit record.
5. Don't get the credit card! You might be tempted to use the “bonus” credit card that comes with the deal but it is likely to have an astronomically high interest rate, it won’t be interest-free and it could force you into a bad debt cycle.
6. Review your account regularly. When you receive your statement check the expiry date on your interest-free deal and make sure you are paying enough to have it paid off completely within the interest-free period.
7. Once you have paid the last repayment, make sure you close the account. This will require a phone call or maybe even something in writing. Otherwise you will continue to have the account keeping fee debited from your bank account – And who knows how long $6 per month could go unnoticed!
In a nutshell - Interest Free deals can be a good thing, providing you use them wisely! If you want to avoid interest, aim to pay off the loan one month earlier & then close your account completely when you’re done.
