Making Interest-free Deals Work for You 

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They have been around for decades but interest-free credit deals can still be confusing and costly when not managed correctly.

Longer finance terms on high amounts make attractive offers difficult to resist in excitably advertised deals. For example, to get five years of interest-free on purchases from some retailers, the minimum spend is $1,000. This simple condition could turn a necessary purchase of a new fridge into multiple purchases prompted by the seemingly innocent question, “Do you need to upgrade your TV?”. 

Five years up your sleeve to pay off a larger purchase may sound too tempting to pass up but never forget the age-tested maxim “buyer beware”. In the case of interest-free credit, it’s not always as simple as it sounds. 

How do these deals make money? 

Not to be confused with the newer “buy now, pay later” products where no interest is ever charged, interest-free deals simply defer the interest to the end of the promotional period and then it appears with guns blazing! Interest will be charged on any outstanding amount at ridiculously high levels, often close to 30% per annum. 

For instance, if you had a loan of $3,000, how would you feel about paying an extra $1,000 interest per year? That’s not smart buying. 

Although some do, the credit provider is not obligated to warn that the interest-free period is ending. It’s up to you to calculate the monthly repayments to clear the debt during the interest-free period and pay that amount – or more if you can.  

It’s not just interest 

It may seem attractive, but having a longer period to pay off a purchase will cost you more, particularly when it’s for a relatively inexpensive item, eg. a $1,000 TV. The monthly account-keeping fee will add up considerably over a longer period. Five years (60 months) at $5.95 is an extra $357 in fees. Reducing the period of the loan will save you money on these fees. There are also late payment fees if you miss the monthly due date. 

As part of the deal, you will usually be provided with a store card or another credit card for this purchase. Request a credit limit matching your purchase, as higher limits can encourage additional spending. Take control and stick to your decision. Salesmen may say you can’t increase the credit limit later.

Cancel the card if you pay the balance within 12 months and won’t use it again to avoid annual fees.

Buying smart 

If you intend to buy using an interest-free offer, check your budget and make sure you can repay the entire purchase price (plus fees) before the expiry of the interest-free period. Managed well, interest will be your friend. If not, it will be a very expensive enemy.      

Book a free appointment with our experienced financial advisers for expert advice on achieving your financial goals:

ASIC’s MoneySmart website Interest-free deals 
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