Is 'Interest-Free' Credit Really Interest Free?

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There’s nothing like that gut-wrenching feeling you get when you lose a phone or spill coffee all over your laptop, and you’re all out of savings. If you’re in the market for a loan it’s tempting to accept the first offer you receive, especially when that ‘interest free’ deal seems perfect. However, you need to be careful.

Many retailers advertise in-store ‘interest-free’ credit for those in need of a loan quickly. This is particularly true of finance for expensive gadgets.

But when something sounds too good to be true, it probably is. In fact, you may be better looking for a low interest personal loan if you are not good with your money.

Interest free does not mean that you will never pay interest

Whilst the credit is technically interest-free for the promotional period, this is often only the first six to twelve months after you access the credit.

Getting finance from retailers can end up giving you a rude shock when the interest-free period is up, if you don’t check the fine print.

In some cases, an ‘interest-free’ loan can end up costing more than it’s worth. This is especially the case when your interest-free loan is actually a promotional credit card, that unexpectedly changes to a cash advance credit card with 27% interest.

If you’re looking to get a gadget replaced quickly, and are looking for a source of credit, it’s important to compare all the options available on the market, before you sign anything in-store.

Click on the above deals to learn more.

In-store finance can be dangerous, as you are often in a situation where you need to make a decision quickly, with no other financial products to compare.

Before you secure an ‘interest-free’ deal, there are two questions you should ask yourself, to make sure you don’t end up paying for it later.

#1 Are you a frivolous spender or disciplined saver?

Frivolous Spenders: If you’re someone who freaks out before checking their bank balance on a Monday, money probably burns a hole in your pocket.

There’s nothing ‘wrong’ with being a frivolous spender, there are many of us tempted by the constant need to buy. However, if you don’t track your spending and seem at a loss for what exactly you spent your wages on when payday rolls around, an interest-free credit deal may be the death of any savings you have. It could even get you into more debt than you realise.

Many interest free deals come with a credit card attached, so if you need emergency funds at the end of every payday, you could end up using the credit you have “available.” This could see you paying up to $100 interest per month after the promotional period ends, and is not the best idea.

Disciplined Savers: On the other hand, some people are serious savers, and very disciplined when it comes to managing their money. If you’re a disciplined spender, you probably never get a takeaway coffee, pack your own lunch, take the train instead of an uber, check your statements regularly and will always know where your money went.

In this case, you could definitely make the most of an interest free deal, as you should be controlled enough to pay your debt back before the promotional deal ends, and make the most of the interest-free period.

Click on the above deals to learn more.

#2 Is an interest free deal really the best option?

After you take an honest look at your spending, and decide if you’re a disciplined saver or frivolous spender, you can decide whether an interest free deal from a retailer is the best option for you.

To make it easier, here’s a pros and cons list for different credit options, and whether they suit a disciplined saver or frivolous spender the best.

Benefits Disadvantages Suited to:
Interest-free finance - Quick process

- Available from retailers

- Can repay the loan early

- High interest rates after the promotional period ends

- Charges after interest-free period are hidden in the T&Cs

Disciplined savers
Personal Loan (Secured) - Quick, online application

- Longer repayment period than other types of credit

- Set up fees and charges

- Locked into a set loan term

- Need an asset to secure the loan

Frivolous spenders
0% purchase Credit Card - Credit cards offer rewards including frequent flyer points

- Positive impact on your credit score if you repay on time

- Harder approval process

- High interest after the 0% period

- Multiple applications can impact your credit score

Disciplined savers
Personal Loan (unsecured) - Quick, online application
- Do not need an asset as security on the loan
- Longer repayment period than other types of credit
- Longer approval and stricter criteria than a secured loan

- Higher interest rate than secured personal loans

- Need a high credit rating

- Higher fees than a secured loan

Frivolous spenders

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Comments

    Store cards are a terrible trap. The 27% interest comment is not an exaggeration either. They are horrible, horrible things if you keep using them.

    That said, you can use them effectively for the "no interest" purchases. You don't even have to be disciplined, just set up an automatic debit from your savings account that happens right after you're paid. That way you guarantee that the store card is the first thing getting paid off.

    You need to work out the cost of the item divided by the interest free duration and set your automatic payment to that. eg: $1000 TV on 24 months interest free = $41.66 (recurring) per month. So if you set your payment to $42 a month you're fine.

    But most importantly, when you get the physical card in the mail you need to cut it up immediately so you're not tempted to use it more.

    If you're going another route, personal loans are the best option but they are super hard to actually get. Most banks flat out don't want to give personal loans, and they're even less interested if you're the sort of person who doesn't have the money to buy a $1000 item *now*. Which leads to the stupid (borderline criminal) option - the banks will typically offer you a credit card instead, or if you already have a credit card nine times out of ten they'' raise the limit.

    They do this for the simple reason that they expect to make more money out of you from a credit card than a loan. The cards are typically higher rate (though usually 10% lower than a store card if not more!) and they (like store cards) provide a route to impulse buying that a loan doesn't.

    If you wind up with a credit card you can always use the same approach as a store card. Set your monthly payments then cut the physical card up so you're not tempted to use it.

    Finally, you can consider using a provider like Afterpay or Zippay. Just again, set a regular automatic payment to avoid (or at least reduce) fees. Personally, I'd only use a provider like this if I knew I could pay it off entirely before their fees kick in (usually a month or so).

    Financing anything pretty much gives up your ability to negotiate. If you do get a better price the only consolation is that you didn't get ripped by taking it for the original price offerred. The price of finance is already built into the price. The reseller and the financier are then betting on most people taking longer that they planned to pay. If they don't then they make their money on the inflated price. If they do, bonus! They make even more money on the interest payments.

    I woulda though a "disciplined saver" wouldn't need a loan anyway...

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