The hidden costs of interest-free periods

Anyone who has been shopping around for appliances will have seen these incredible offers for 12, 24, or sometimes up to 50 months interest-free on appliance purchases.

These deals seem almost too good to be true. You need to remember that businesses never really give you something for nothing, and ‘interest-free’ does not mean that there are no fees or other hidden charges.

Understanding the fine print

Purchasing appliance with an interest-free period or deferred payment period usually requires you to apply for a particular credit card or store card. This means that you will need to agree to a credit card contract. Just like with any other type of contract, you need to understand your legal and financial responsibilities.

Different stores will offer deals with different terms and conditions, so make sure you fully understand the fine print before you agree to anything. Ask the salespeople in the store to explain the details of the deal, some questions you may want to ask include:

  • What fees are there and how much are they?
  • How much is the interest rate after the interest-free period?
  • What happens if you miss a payment?

How much does interest-free actually cost?

If you decide to buy appliances with an interest-free deal, you should aim to pay off the total amount as quickly as possible and always before the end of the interest-free period. Be aware that the minimum or recommended payments may not be enough to pay off the total purchase amount within this period.

According to ASIC, the costs of interest-free purchases include:

  • Interest on remaining amount after the promotional period can be almost 30%
  • An establishment fee is often charged when you make the purchase, this is in addition to the principal amount and is not a deposit
  • Monthly or annual fees are charged during the interest-free period

Make sure you calculate what you will need to pay each month in order to pay off the total amount before the end of the promotional period. ​You should budget for this amount and make sure you can actually afford to pay off the purchase in time. If you can’t afford to pay off the purchase within the promotional period, then you can’t afford ​not ​to.

Example and comparison with credit cards

Here is a hypothetical example of how much it might cost you to purchase appliances ​with an interest-free promotion. Different stores will have different offers and may charge different fees.

​Purchase amount ​$800
​Establishment fee ​$25
​Monthly fee ​$4.95
​Interest free period ​24 months
​Total fees charged ​$143.80
​Total amount payable ​$943.80

This is how much the purchase will cost if you pay it off during the interest-free period. If you have some amount still owing at the end of this period, this will make the purchase even more expensive.

If you were to make the same purchase on a regular credit card, you might end paying a similar or lesser amount. This is how the purchase will cost over two years on a credit card:

  • $907($107 of interest charges) at an interest rate of 49%
  • $944($144 of interest charges) at an interest rate of 18%

Note: these amounts do not include annual fees that may apply, depending on the type of credit card.

From this, you can see that interest-free promotions come with very similar costs when compared to regular credit cards. Because of this, you should not think of them as special deals that provide savings, but rather as an alternative to regular credit purchases.

However, interest-free promotions also come with the risk of having to pay very high interest rates if you do not pay off the total amount before the end of the interest-free period. Because of this, there is little or no benefit of purchasing appliances with an interest-free promotion.

About the Author​

Rose Lawyers have been operating in Melbourne for over 35 years. They provide legal advice and representation for property, business, and family matters as well as criminal and civil litigation.​

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Original author: Simon Downes.

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