When you take into account in-store finance fees and charges, low interest rate credit cards can sometimes work out better…

… and you can haggle for a discount.

“0% Interest, No Deposit, No Payments for 12 Months”

Sound tempting? Why wait? Why not buy that new TV now? Before you do though, check the fine print.

In this real world example from a major retailer, for purchases of $300 or more, the fine print includes;

  • a $25 establishment fee.
  • an account service fee of $4.95 per month.
  • 29.49% p.a. interest on outstanding balances after the interest free period ends.

So in the best case scenario for a $300 purchase – where you fully repay the loan within 12 months – you will still have paid $84.40 in fees. That’s 28% of the $300 purchase, equivalent to a 28% interest rate. And if you have any outstanding balance after 12 months you’ll pay 29.49% p.a. interest.

That makes even high interest rate credit cards look cheap.

And the stores usually say they can’t give you a discount with finance deals.

So how do you make these deals work for you?

In the above example, the same fees applied to a $5,000 purchase make more sense. The $84.40 in fees equates to only 1.7% of the $5,000 purchase… as long as you can afford to repay the $5,000 within 12 months. Otherwise you’ll pay $122.88 per month in interest alone (assuming the whole $5,000 is outstanding). That’s $1,474.50 per annum!

In other words, the devil is in the details. Ideally you should delay the purchase and save until you can afford it, or put it on lay-by, but if you’re tempted by the in-store finance offer, do your homework. Literally. Collect all the information than go home and do your own maths.

Watch out for…

  • fees and charges: setup fees, monthly account fees and late payment fees.
  • the interest rate which applies to outstanding balances after the interest free period ends.
  • minimum monthly payments which do not fully repay the loan amount: you will need to calculate your own repayments to make sure you don’t exceed the interest free period.
  • extra payments: in some cases you can’t make extra payments above the minimum, so you’ll need to save up the amount needed to repay the balance at the end of the interest free period.
  • extra credit: the store cards often provided in these deals are usually more expensive than normal credit cards and you will often be given a credit limit more than is needed to buy the item you are purchasing – tempting you to buy more.

Once you know exactly what you’ll pay and when, you can decide if it’s worth proceeding.

What are your thoughts?

Have you had good or bad experiences with interest free in store finance deals? Is there anything else you’d like to know about day to day money management?

Join the conversation — leave a comment below and let us know what you’re thoughts are.

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