We all have seen the interest free loans ad on tellie from retail giants like Domain and Harvey Norman to name but a few spruiking “Buy now 36 months interest free!” or “Buy now and Pay Later!”. But what does it really mean?
Just a word of warning any finance that you apply for will appear on your credit record whether you are accepted or not.
At once stage if you took up these deals to buy furniture and bedding on interest free terms if you didn’t pay on time you were slugged with interest right back to the time of initial purchase, be that 12, 36 or 60 months ago. The interest rate on these deals was quite hefty at 20% plus. There still may be some contracts with these terms so it pays to check before you sign. If you know of any offers that still have these terms please post to the comments below, so we can all avoid or at the least manage so we don’t get a nasty surprise.
Review of Terms for an Interest Free Finance
I recently got a hold of an Interest Free contract for a large retailer. The finance is through a Third Party (which is common) and it is approved/declined generally within the hour. The amount of finance applied for was just short of $2,000 for furniture. In order to obtain the no interest loans you apply for a credit card. Although only $2,000 was required to pay for the furniture a credit limit of $3,000 was approved.
There are a number of repayment options for interest free loans:
- Interest Free purchase: Minimum monthly payments are required during the interest free period.
- Instalment interest free purchase: Monthly instalments are required during the interest free period. If all specified repayments are made in full and on time during the promotional period, the purchase will be paid in full and no interest will accrue.
- Buy Now Pay Later: No repayments are required during the buy now pay later period. Repayments are required on any outstanding balance after the promotional term expires.
Based on the options above the safest option would seem to be the instalment interest free purchase, after all if you pay all repayments then on time you will not pay any interest. Please note that a fee of $20 will be charged if the amount is not paid on time.
The terms on the contract I have if 60 months on the instalment interest free purchase, based on a borrowed amount of $2,000 payments should be around $34 per month (if paid on time). Surprisingly it doesn’t seem to actually state the monthly payment on the credit agreement, but I assume as it is a credit card that is where it will appear. There is a $99 fee when you first draw down on the loan (credit card) and will be charged on an annual basis (5 years X $99= $495).
It is also important to remember that depending on the terms on offer, if you add any extras on the loan (credit card) these may not be interest free. Under this contract, if an amount of over $250 is spent in one transaction the purchase is interest free for 6 months. If the amount is only $249.99 then interest fee of up to 55 days applies.
Interest free Purchase
This is one that may catch you out if you are not paying attention. You are required to pay a minimum monthly payment. If you only pay the minimum you may not have paid off the interest in the interest fee period. In that case you will be charged the credit card interest rate on the balance remaining or if you contract states on the full amount back dated.
Our contract says that you must pay 3% of the adjusted closing balance or $25 whichever is greater. Also for our contract as it is under the instalment payment option we must also pay the instalment amount as well. So keep this in mind if you also have put expenses on the credit card (in addition to original purchases).
You may incur a fee if you draw down cash on the credit card. Cash advances also generally will not have any interest free period.
Buy Now Pay Later Purchases
To take out this type of finance I would suggest that you would need to have control of your finances. In our example you would need to know that you have $2,000 at the end of 60 months. In the meantime you would need to cover annual credit card fees and any other fees levied.
As your credit card limit is higher than the original purchases, you would also want to be able to control your expenses put on this card.
To my way of thinking, paying for a bed or furniture 60 months after purchase would be a bit depressing. The purchases would have aged and you now need to stump up the money. It is bit like paying for a holiday on credit and then needing to pay long after the fun has ended.
What happens if you don’t pay off within interest free period?
It is important to check the terms of your contract and that will determine what will happen. Under our example policy, you will be paid interest on the unpaid balance. The terms of this contract state that interest is new back dated. The current interest rate that applies for interest free or buy now pay later purchase is 22..99% p.a.
Can you make additional repayments on interest free finance?
Under our contract, yes you can but make sure it is a term you check before you sign.
I have purchased furniture through an interest free loans before and all was fine. I think the trick is to know your budget and to assess whether you can afford it. To read the contract and make sure you are aware of your obligation. You may wish to go with an option (such as an instalment option which ensures you pay in the promotional period) and reduce the credit limit to the amount of the initial purchases. If you really don’t think you will be able to pay off in the time frame, you may wish to consider other options such as a personal loan or lay by for smaller items.
Below I have listed some questions you may want to ask before signing, let us know if you have any others you think are relevant.
Questions to ask:
- If I do not pay of purchase within interest free period: What is the interest rate that I will pay once the interest free period ends? Is it on only the unpaid amount or the full amount back dated to initial contract?
- If I am approved for $3,000 but only want $2,000 credit limit on credit card (loan) am I able to reduce?
- If I only pay the minimum monthly payments, will the loan be paid out at the end of the finance term?
- What are my repayments if I want to pay out the contract within the promotional term?
- Are there any annual fees?
- Any late fees?