Interest Free Terms

[Jackfrost]

I went to buy our new couch today and decided whether to use a chunk of our savings to pay cash or to access interest free terms through the store. We sit our savings in our home loan to reduce interest so the decision was to pay cash and get $100 of the purchase price or access purchase free on an existing account, keep the $3500 in my home loan reducing interest there and budget for the repayments.

I've heard a bit of negativity around interest free but to me it is a sensible option as long as you pay well above the minimum repayments and cut up the card they send you if you think you'd be tempted to use it.

If a store has a product you are after and at the right price do you access interest free terms or just pay cash?

 

[checkraiseulite]

There are generally other fees & charges associated with store-financed goods. Account set-up and account-keeping fees etc. I would find out what these were and whether you're actually going to end up saving substantially more than the $100 cash discount over the long-run and weigh this up against what you're saving on your mortgage.

Personally I would pay cash for it but I don't have a mortgage or a heap of other financial commitments. I guess it's just a matter of personal preference/circumstance.

 

[Catfish Alley]

Yeah, as long as there are no hidden fees and you pay it off before the interest ramps up then it's not a bad option. I remember we did that when we settled into our first place.

 

[Sanders]

No such thing as interest free.

Ultimately it has to be paid for in the price

 

[Catfish Alley]

No such thing as interest free.

Ultimately it has to be paid for in the price

True. But it can be easier to spread payments. Same reason why you can pay insurance in monthly installments.

 

[Sanders]

True. But it can be easier to spread payments. Same reason why you can pay insurance in monthly installments.

Look that's fine if you're happy with the deal go for it, but there is no such thing as a free lunch

 

[Catfish Alley]

It was about 10 years ago that I got anything interest free. Don't need it now. Just saying, many people can afford a little bit each month but not paying a lump sum. It's up to the individual. As long as you're not stupid and make minimum payments before getting hit by a 30% rate once the interest free period lapses.

 

[Happy Mastenator]

If they are only offering a $100 discount for paying cash then the interest free terms may work nicely. Just double check to see if there is a balloon payment due at the end of the interest free term and pay it in full, and make your payments on time.

Most of the people stung by interest free terms are those who dont keep up payments and/or didn't realise there was a balloon payment and don't have the amount necessary when it comes due.

 

[Cap]

I use interest free all the time, I just make sure it has a nil balance on it at the end.

hell, I've cyceld through about 10 credit card providers moving amounts from $5k to $3k to 0% or low % rates and take advantage of honeymoon rates (why wouldn't you if you have a mortgage)

It has taken me 5 years to pay back about $5k at the most I ever paid was 2.9% for 6 months (so $15), oh and once I forgot to cancel the card and they slugged me an annual fee, but then dropped my rate back to 0.00% for 12 months so effectively it was a 1% rate on 6k

Given the time value of money I have got a free lunch.

That being said, I'm looking forward to paying the last 2k off, I want to do some study so I can start the cycle again (pay it back off my tax return)

 

[Caesar]

It's good in some circumstances. A lot of people don't use it right. I reckon it's useful mostly in two scenarios:

1) You need the product immediately and don't have the cash. e.g. your washing machine breaks.
2) You have the cash, but you can earn more than the credit card account fees, plus any discount they give you for paying cash, by investing the money elsewhere.

(2) is something that a lot of my friends ignore. $5 a month in account keeping fees for a year or so, plus a couple of hundred dollars in the discount you forgo off the purchase price is a sizeable percentage if you're only buying something worth a grand or two. If you are just going to leave the cash you save sitting in the bank then you may be better off paying upfront.

Not that I always stick to these rules. I used it to buy my TV system when I first moved out by myself. Strictly speaking, it probably would have made better sense financially if I'd saved up and lived without it for a few months. But I wanted a TV, dammit.

Bottom line is use it, but be aware of the price attached and assess your opportunity cost.

 

[Messenger]

Use it all the time and never paid a cent in interest. As long as the payments fit in your cash flow you're good.

I set up an automatic payment so it gets done.

 

[Andre]

If you pay it off in time it's all good. A good percentage of people don't and they more than cover giving the stores a good profit on this, allowing the smart shoppers to use it.

 

[Bunk Moreland]

Yeah, they just cop the smart ones and make their money of the few dumb ones who don’t pay it off. In that sense it a little predatory, when you’re relying purely on the dropkicks to make a profit.

It’s fine if you’re generally pretty disciplined with this stuff. Morons get bored with their new couch or TV after 6 months, decide they want to buy something else, spend their money on that, and let the “interest free” payments fly off without making them. Then call Today Tonight when it all comes home to roost.

I personally have never used it, I don’t really think it’s a good habit to get into, buying random stuff you prob don’t really need on random credit. Better to just buy what you can afford, or use a credit card, the interest isn’t that bad over a few months and it’s all consolidated on a single statement that you get loud and clear every month. I don’t think the small benefit you may be able to work out in terms of opportunity cost and banking your TV or couch money instead etc is really worth it in the face of forming good habits around your spending patterns, which will last a lifetime.

It’d be useful in situations like washing machine or TV example above, when you need something now but don’t have the paper.

 

[Scotland]

Surprised JoondalupJ hasn't shown up with a long-winded, incoherent rant.

Interest free deals are no different to any other form of credit, IMO. Provided the terms and conditions are explicitly stated and you read and understand them then there is no problem with buying a TV and paying for it 12 months later etc. If it clearly says on page 1 '$5 monthly fee, $50 application fee, 20% p.a. after 12 months etc.' then I've got no time for people who whinge because they thought it was free money.

I personally have never signed up for an interest free deal and don't even own a credit card (prefer to have the money before making any large purchases) but each to their own. If you don't have $2,000 to spend but want a $2,000 TV then maybe you shouldn't be signing up to agree to having it later, but by the same token for some people it acts as forced saving. I think car loans are a waste of money, but for some people it's the only way they'll own a decent car. They can afford $200/week or whatever to pay the loan, but they don't have the savings will to put that much aside each week without it.

 

[mantis]

If you pay it off in time it's all good. A good percentage of people don't and they more than cover giving the stores a good profit on this, allowing the smart shoppers to use it.

Exactly, I always use the no repayment interest free terms, for big purchases like fridges etc. You get to keep your money in your interest paying account, while only having to pay a $2.50 a month account keeping fee.

I love it, but feel sorry for people who use it & aren't able to pay the purchase off, before the high interest kicks in.

 

[zimma]

You just have to watch out and make sure you work it out properly to pay it off before the interest kicks in, they by default usually sort it out with a monthly repayment that will leave you with half or more of the balance still owing at the end. As long as you watch out for that and any fees it isn't that bad...

 

[Sanders]

I use interest free all the time, I just make sure it has a nil balance on it at the end.

hell, I've cyceld through about 10 credit card providers moving amounts from $5k to $3k to 0% or low % rates and take advantage of honeymoon rates (why wouldn't you if you have a mortgage)

It has taken me 5 years to pay back about $5k at the most I ever paid was 2.9% for 6 months (so $15), oh and once I forgot to cancel the card and they slugged me an annual fee, but then dropped my rate back to 0.00% for 12 months so effectively it was a 1% rate on 6k

Given the time value of money I have got a free lunch.

That being said, I'm looking forward to paying the last 2k off, I want to do some study so I can start the cycle again (pay it back off my tax return)

That depends on the price you paid in the first place

 

[Jackfrost]

Great comments and I agree that they are predatory because they rely on a percentage of people to only pay the minimum repayments and get stung with 29% interest. The other thing they do is insist that you receive a card that can be used at high interest once you reduce your balance and regularly send letters offering to increase your credit limit.

You need to treat it as a loan rather than a credit card and you will be fine. I have a GE Creditline account that sits at zero balance with no fees so there is no setup fees and once I access funds I pay it off at $300/month. In this instance I'll have it paid off in 12 months within 60 month terms. I also cut the card up once they send it.

 

[Northworth]

it will come back and bite you if you apply for a loan

I bought a couch interest free and that involved getting a GE credit card - with ridiculous rates

I paid off the couch in a few months and forgot about it... but when I went for a home loan a year later the bank said that the GE credit card (with a zero balance) is a contingent liability and therefore a risk to the bank... so I cancelled the card.

You just have to be careful with these things

 

[brucetiki]

it will come back and bite you if you apply for a loan

I bought a couch interest free and that involved getting a GE credit card - with ridiculous rates

I paid off the couch in a few months and forgot about it... but when I went for a home loan a year later the bank said that the GE credit card (with a zero balance) is a contingent liability and therefore a risk to the bank... so I cancelled the card.

You just have to be careful with these things

Same thing happened to me, but it's just as easy to cancel the card, apply for the home loan, and then reapply for the card once you've moved in. I did that (wasn't intending to reapply for the card, but my laptop broke a few months after I moved in, so got it interest free - and paid it off well within the interest free period).

The scary thing is that a) they approved it for $8000 (which I know I would never be able to manage, so will never ever get something that big on it) and b) they kept offering to up the limit up to $12000 (I threw the letter out enough times for them to stop offering it to me).

While I know where my limits are with interest free, there would be a lot of people who wouldn't, and therefore would fall into the trap of paying big interest and chasing their own tail.

If you're smart with it, you can have it work to your advantage, and it's a convenient way to pay off big purchases. If you're dumb enough with it, it can truly take you for a ride.

 

[Jackfrost]

it will come back and bite you if you apply for a loan

I bought a couch interest free and that involved getting a GE credit card - with ridiculous rates

I paid off the couch in a few months and forgot about it... but when I went for a home loan a year later the bank said that the GE credit card (with a zero balance) is a contingent liability and therefore a risk to the bank... so I cancelled the card.

You just have to be careful with these things

Yeah that's the other issue with finance but I guess if around $3000 is the difference between getting a home loan or not you don't have much of a margin to work with and probably won't be able to handle any interest rate rises so shouldn't be stretching yourself out too far anyway

 

[Caesar]

The scary thing is that a) they approved it for $8000 (which I know I would never be able to manage, so will never ever get something that big on it) and b) they kept offering to up the limit up to $12000 (I threw the letter out enough times for them to stop offering it to me).

I have no idea how they work this out. Back before they changed the rules I had my credit card limit with the CBA automatically increased from $4,000 to fully half my salary excluding super. Granted I had a few grand cash in the bank and no other debt, but that's just an insane amount of credit to give a guy in his early 20s and I never could have serviced it. I had to physically call them and ask them to reduce my credit limit.

Just the other month I received a new credit card with a higher limit in the mail from my bank with instructions about how to activate it. No warning. I called them up assuming it was a mistake and they said "oh if you're eligible we just send it out. If you don't want it just cut it up".

No wonder this country has a debt problem.

 

[mantis]

it will come back and bite you if you apply for a loan

I bought a couch interest free and that involved getting a GE credit card - with ridiculous rates

I paid off the couch in a few months and forgot about it... but when I went for a home loan a year later the bank said that the GE credit card (with a zero balance) is a contingent liability and therefore a risk to the bank... so I cancelled the card.

You just have to be careful with these things

That is scary.

Another thing, when me & my first ex went to apply for a home loan, the bank took ages to approve it because we had no credit history. We always paid cash for everything & even though we had the deposit & good jobs, they weren't keen to lend us money. Seems you have to go into debt to get a loan.

 

[Caesar]

That is scary.

Another thing, when me & my first ex went to apply for a home loan, the bank took ages to approve it, because we had no credit history. We always paid cash for everything & even though we had the deposit & good jobs, they weren't keen to lend us money. Seems you have to go into debt to get a loan.

That's actually the main reason I got a credit card. Spent five years putting all my expenses on the card and paying it off at the end of the month = solid credit history when you go to get a loan.

 

[brucetiki]

Yeah that's the other issue with finance but I guess if around $3000 is the difference between getting a home loan or not you don't have much of a margin to work with and probably won't be able to handle any interest rate rises so shouldn't be stretching yourself out too far anyway

I don't think it's necessarily the difference between getting a mortgage approved and getting a mortgage not approved, it's more the amount the bank will give you.