Interest-free loans can work in a number of different ways:
- Pay by instalments – regular payments are required each month.
- Buy now, pay later – you are not required to make any minimum repayment.
WHAT YOU NEED TO KNOW
MINIMUM PAYMENTS – In most instances the minimum repayment will not be sufficient to repay the loan during the interest-free period. If you wish to repay the loan within the interest-free period, you will need to make additional payments each month.
BE AWARE: In some instances you will need to make arrangements with the financier to make these additional payments otherwise the additional amount may be held in credit against future minimum repayments.
INTEREST RATES – Interest will start to be charged at the end of the interest-free term, usually at a very high rate. It is not uncommon for these interest rates to be at least 20%.
BE AWARE: Penalty interest may be charged for not paying the balance off within the interest-free period.
PAYMENT DEFAULT – If you default on the loan (e.g. miss a repayment during the interest-free period) it is not uncommon for the loan to cease being interest-free with commercial rates of interest being charged moving forward.
TIP: It is best to set up regular direct debts from your bank account to ensure that all payments are made on time.
NO DISCOUNT – Ever notice that when you buy an item with an interest-free loan that the retail attendant will never discount the purchase price? This is because the retailer is not generally the financier and there is a third party. The retail store will normally share a percentage of the sale price with the financier to ensure that the financier receives some payment in the event that you repay the loan within the interest-free period.
HIGH FEES – Even though there may be no deposit and interest, most loans do charge application and monthly fees.
BE AWARE: It is not uncommon for these monthly fees to be $4.95 per month, or nearly $60 per year.
COMES WITH A CREDIT CARD – Some financiers offer a credit card with the loan to tempt you to spend more. BE AWARE: Most of these credit cards have interest rates significantly above other credit cards available in the market.
HOW TO TAKE ADVANTAGE OF INTEREST-FREE LOANS
WORK OUT THE NUMBERS – Ask the retail assistant what discount would be available for a cash sale then determine the monthly charges to calculate how much the interest-free loan will actually be costing you.
REPAY DURING THE INTEREST FREE PERIOD – Make sure you repay the loan IN FULL within the interest-free period to avoid default interest or extremely high rates of interest.
If you REALLY need the item and have a mortgage, an option MIGHT be to redraw the amount as your home loan should have the lowest interest rate. BUT PLEASE, PLEASE BE AWARE that unless you pay additional monthly payments and have the goal to pay this portion off as soon as possible, you may actually be adding this debt to your 20-year home loan. And that will not be a good decision.
If you are struggling with your credit card and store card debts we recommend you call us for a full finance review before you consider taking on any more debt.
It is always wise to call our office before considering any new debt. We will let you know about all the hidden and long-term costs of interest-free and other loans to make sure you understand the consequences of your decisions.
1. ASIC, Credit Card Lending in Australia 2017
We recommend that you seek independent financial and taxation advice before acting on any information in this newsletter. It contains general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. Interest rates are subject to change without notice. Lenders terms, conditions, fees & charges apply. ©2019