Buying Interest Free

It’s pretty common these days that stores will offer ‘interest free payment plans’ on expensive products like furniture and electronic equipment. These can be helpful – if you can afford to pay the item back within the interest free period.

Buying a product interest free is a loan. The store or a financing company will be lending you the money to pay for something on the terms that you pay them back. The primary difference with the loan is that they offer an interest free period instead of charging you with interest when you first buy it.

Buying interest free doesn’t equal free. It just means that you won’t be charged a percentage of what you owe each month.

There are usually two ways you can pay for interest-free deals:

•    Payment by installments – you make regular payments each month, with the aim of paying off your purchase by the end of the interest-free period
•    Buy now, pay later – you don’t make any payments until the end of the interest-free period, at which time you pay the full amount, plus fees and charges

Things to be aware of:

You may also have to pay a deposit upfront. Additionally, if you can’t repay this loan within the interest free period, you may be charged a high interest rate on the amount you owe, the interest rate could be up to 30% so always aim to repay your debt early and the store or financing company may backdate the interest so it’s charged from the day you bought the goods.

If you’re paying by installment, the minimum monthly payments suggested by the store or financing company are often not enough to pay off the full purchase price before the interest-free period ends. Do your own sums and work out what you actually need to pay each month to repay the full amount by the end of the interest-free period. It’s probably going to be more than the minimum amount suggested by the store or financing company.

Different retailers offer different deals, so make sure you know exactly what you’re being offered. There may be a few hidden traps so read your contract and ask questions if you don’t understand something.

Make sure you can afford it! Don’t rely on the retailer who is providing you the interest free deal to tell you whether you can afford it. Unlike your financial institution who will generally only lend amounts to you that they believe, on the information available that you can reasonably afford to repay.

I hope this gives you a better understanding of how an Interest Free loan works.

^ Paul – Lending Services Manager

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