Are you considering an interest free deal? Spending money that you don't have is a risky game, especially if you don't know how the process works. We see a lot of interest free deals tempting buyers to make purchases now rather than later.
What a lot of people don't realise is that an interest free deal is a loan. You may not have to pay for the product today but once the interest free period has ended, you will be making repayments (with interest) to pay off the amount you owe.
Here are a few tips to consider before accepting an interest free deal.
Consider Using Lay-By
Before you decide on getting an interest free deal, make sure you seek out other alternatives to purchase the product cheaper. Can you save up the money or put it on lay-by?
A Lay-by agreement lets you purchase a product and pay for it in at least two instalments before taking it home with you. You will be paying less as you won't have to pay for interest or fees by doing this.
Calculate Your Repayments
Make sure the interest free deal you sign allows you to pay more than the minimum monthly amount. Paying the minimum amount won't pay off the item in full before the interest-free period ends. Make sure you understand how much you can afford in repayments.
Don't Take the Deal if You Can't Afford it
A lot of people think if they can pay the minimum amount now, their financial situation would improve later so they could make larger payments. This can result in more debt and stress.
Make Sure You Understand the Fees and Charges
If you do decide to get the interest free deal, make sure you understand all the fees and charges. The ad at the store may say 'no deposit', 'no interest' and 'nothing to pay', but there may be fees for your application, monthly account or payment processing fees. Be sure to read the terms and conditions very carefully and ask questions regarding your credit contract.
Ask what the penalties are for any missed payments and if you can pay the full balance early? Be sure to ask about the interest rate after the interest free period ends and what the penalties would be if you missed a payment then.
Avoid Using Credit Cards
Interest free deals often come with a pre-approved credit card. Despite how easy and tempting it is to use your credit card, try to avoid using it. Keep in mind that interest free periods do not apply to cash advances. The interest rate for cash advance can be as high as 29% and you will have to pay a withdrawal fee on top of that. In most cases, you will be hit with the interest as soon as you withdraw the cash.
Review Your Account Regularly
Make sure you're on top of your payments and that you always know when the expiry date for the interest free deal is. The creditors are not obliged to inform you of the expiry date, so it's up to you to remind yourself. Make sure you also plan your payments so that you can pay off the full balance by the end of the expiry date.
Avoid Applying for Multiple Interest Free Deals
Try to avoid applying for multiple deals as every time you submit a credit application, it leaves an enquiry on your credit report even if its declined. This can impact your borrowing power in the future if you decide to apply for a loan.
Plan Your Spending so You Make Any Bigger Purchases at the Start of the Statement
Before you plan on purchasing anything expensive with the interest free deal, make sure you purchase it at the start of the statement. This gives yourself more time to repay the full amount by the end of the interest free period.
Example
Let's say you recently bought a dining table set for $2,500, how much would you need to pay monthly to keep on track of your 24-month interest free period?
The minimum repayment amount for the set is $80, but if you only pay the minimum amount you won't pay off the full amount within the interest free period. So how much would you actually have to pay monthly in order to avoid the high cost that comes with the end of the interest free period?
You would need to make a payment of $110.16 per month, otherwise you will end up being hit with a high interest rate.
Total Amount: $2,500
Interest Free Period: 24 Months
Application Fees: $25
Monthly or Payment Processing Fees: $4.95
Total Cost: $2,643.80
Monthly Cost: $110.16
For more information on budgeting and how it can help get your finances back on track, check out our budgeting page.
