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Avoid the interest-free rip off

by Andrew Willink
2 July 2008

Buy now, pay later - there’s no shortage of interest-free offers from stores selling everything from designer furniture to home theatre packages. While it’s tempting to take home the very latest gizmo and worry about paying for it later, be aware of how another big debt could affect your finances after the novelty wears off and real life kicks back in.

Like any financial product, store finance, as it is known, is great if you play by the rules and pay it off before the promotional date expires. The sting in the tail is the hefty interest charge at the end of the term. Rates approaching 30% are incentive enough to pay out the loan early. However, events that come out of the blue always have the potential to cause your finances to hit speed bumps on the road to timely repayment. Paying nearly 30% interest on an outstanding amount after the end of the special offer negates any price saving you made have made on the item in the first place.

In an ideal world, an interest-free deal paid off before the expiry date is hard to beat. You simply pay the original ticket price of the item at the store and you have extra time to pay it off. However, it’s when good intentions go astray that the lender (usually quite separate from the retail store) makes money. Let’s look at a hypothetical scenario of buying furniture or a home theatre package worth $10,000 using store finance of 18 months interest free or a personal loan at 10% over three years.

By using a personal loan, the regular monthly repayment of $322 sees the $10,000 debt completely paid out after three years for a total cost of $11,616.

Using store finance of 18-months interest-free but paying only $5,000 during the interest-free period will result in the remaining $5,000 accruing just under 30% interest. After a further 18 months paying off what’s owed, you will very nearly catch up to the personal loan total, diminishing the savings benefit you signed up for in the first place.

Worse is to come though, in the form of not paying anything during the first 18-month interest-free period. Not only will your monthly repayments double to $691 for the next 18 months, but you will pay a total of $12,449 when the loan reaches maturity. That’s over $800 more than the personal loan.

There’s no doubt interest-free store finance is excellent if used properly. If not, things can easily unravel. A personal loan can sometimes be seen as a tortoise-and-hare approach but if you like to be in full control of your finances and don’t want any surprises derailing your debt elimination plans, a personal loan is the safest way to go.