Many large department stores advertise that you can buy things such as TVs, fridges and sofas using interest free deals. Be careful with these deals – ‘interest free’ doesn’t mean ‘fee free’ and these deals can leave you more out of pocket than you expected.
Interest free deals let you have the TV or fridge and pay for it later, either by regular monthly instalments or at the end of an interest free period.
While a store may advertise that ‘you don’t have to pay a deposit, there is no interest and there is nothing to pay for 18, 24 or even 26 months’, in most cases you will still be charged fees. These could include an establishment fee, a monthly service fee and a late payment fee. Before you sign anything, ask about all the fees and charges so you can work out exactly how much you will have to pay back.
ASIC has developed a free mobile calculator that you can use on your smart phone to help you work out how much an interest free deal will really cost you. Try it next time you are considering buying something that is advertised as interest free. Visit http://m.moneysmart.gov.au on your mobile phone and save it to your bookmarks or homepage so you can access it in-store.
Let’s look at an example of how the mobile calculator works.
Maya wanted to buy a new 3D television. She visited a store and they told her she could get the TV for $2,300 on an interest-free deal for 18 months. Maya asked the salesperson what the fees were, and found out there was a $25 establishment fee and a $12 monthly service fee. She used the MoneySmart mobile calculator and realised she would have had to pay $141 in fees, which was equivalent to an interest rate of 13.6%.
Here are some tips for managing interest free deals.
Watch out for the end of the interest free period
Credit providers are not obliged to remind you when the interest-free period is due to run out, so you need to keep on top of this yourself. If you fail to repay the total amount owing on your purchase by the end of the interest-free period, your credit provider will start charging you interest.
The interest rate charged could be very high – up to 30%, and often much higher than standard interest rates on credit cards which average between 12-20%. So always aim to repay the debt early.
Beware of store cards
Sometimes a retailer will give you a store card with your interest-free deal. You may be tempted to use it to buy more goods on credit, but this is often not a good idea as store cards usually have higher interest rates than regular credit cards and any purchases you make with the store card will not attract the interest-free terms you signed up for.
The store card will also often have a credit limit that’s higher than the value of your interest-free purchase. Ask for the limit to be lowered to the amount of the debt, that is, the full purchase price.
Once you have paid off the interest free deal, write to the credit provider to cancel the store card. Then you won’t be tempted to use it for more purchases.
The minimum monthly payment is often not enough
If you’re paying by instalment, the minimum monthly payments suggested by the retailer who signs you up for the deal are often not enough to pay off the full purchase price before the interest-free period runs out. This means you may be left with a large outstanding amount to pay at the end of the interest-free period. Make sure your agreed repayments are enough to pay off the full amount within the interest-free period.
Is an interest free deal your best option?
Explore all your purchasing options before you sign up for an interest-free deal. You may be better off saving up to buy the item instead, or buying the goods on lay-by. If you lay-by, you will have to wait until you’ve paid your purchase off in full before taking the item home, but you will save money in fees and interest.
For more information about interest free deals visit ASIC’s consumer and investor website, www.moneysmart.gov.au or call 1300 300 630.
My last article
This is the last article from me for the services newspapers as my term as ASIC Chairman ends in May 2011. It has been a pleasure working closely with the ADF on a number of issues and I’d like to take this opportunity to thank all ADF members for your questions and topic suggestions for this regular article.
I’d also like to thank everyone at the ADF Financial Services Consumer Council for their ongoing work in helping ADF members manage their money and for partnering with ASIC on many projects. It’s some of the best work we do.
The new ASIC Chairman, Mr Greg Medcraft, will be contributing to the service newspapers from June 2011. I know he will enjoy working with the ADF as much as I have.
E-mail ASIC with topics that interest you via email@example.com.
Tony D’Aloisio BA LLB (Hons)
Australian Securities and Investments Commission