'Interest free not always cheap'

AS we head into spring, you may be thinking about buying an air conditioner or some new outdoor furniture.  Many large retailers offer interest-free deals on these types of big ticket items, but be wary of taking up these offers. You could end up spending a lot more than you bargained for.

Interest-free deals have taken over from lay-by for many larger purchases as it means shoppers can enjoy an item now rather than waiting for months or years before it’s paid off in full.

With interest-free finance you can usually pay off the goods by making regular monthly instalments or in a lump sum payment at the end of the interest-free period.

It may sound very consumer-friendly but these deals are often laden with ongoing fees and very high interest rates if you don’t stick firmly to the repayments schedule.

One of the key things to realise is that ‘interest-free’ doesn’t mean fee-free.  Stores may make claim things like ‘no deposit’, ‘no interest’ or ‘nothing to pay’ in their advertising, but in most cases you will still be charged fees.

These could include an establishment fee, a monthly service fee and a late payment fee – all on top of the purchase price. Before you sign the contract for an interest-free deal, ask about the fees and charges you’ll be up for, so that you know exactly how much you will have to pay back.

It also pays to make a careful note of when the interest-free period expires. Our investment regulator ASIC warns that credit providers are not obliged to tell you when the interest-free period is about to expire. You need to keep on top of this yourself.

If you fail to repay the total purchase by the end of the interest-free period, your credit provider will start charging interest, often at ridiculously high rates.

You may be charged interest of up to 30% – significantly more than even the dearest credit cards. This makes it important to pay off the purchase before interest applies. If you have any doubts about your ability to do this, you need to rethink the decision to choose interest-free finance.

If you choose to pay for the purchase by instalments it’s essential to realise that the minimum monthly payment suggested by the retailer may not be enough to clear the balance before interest applies.

Again it’s up to you to work out the payments you need to make to avoid interest charges.

When you add up the downsides of interest-free deals, lay-by starts to look pretty good. For more information on interest-free deals take a look at my book Making Money or download a factsheet from ASIC’s consumer website.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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