Is it ever a good idea to choose interest free?

/ personal finance

In a world where nearly every purchase imaginable is prefaced by additional processing fees, GST and other charges, it's easy to see how people can become frustrated with lurking extra costs. Interest is easily amongst the most deplored of these price hikes, presenting an added incentive to make repayments on time.

The allure of an interest-free loan or credit card is understandably strong, providing consumers with the option to take advantage of credit without the added fees over a certain period of months. Large department stores are also abundant with such interest-free deals, offering customers to take home that flat screen TV without needing to lay down the full amount straight away.

As the old adage goes, if it's too good to be true, it probably is. Interest-free offers, like any form of credit, will always come with their own terms and conditions, so it's important to do your research before you commit.

How does an interest-free deal work? 

The two main types of interest-free arrangements that you are likely to encounter:

Monthly instalments: This involves paying off the purchase via monthly instalments over an agreed time period, interest-free. The Australian Security and Investments Commission (ASIC) recommends only going with this option if you can pay more than the minimum amount each month, as this amount won't allow you to pay off what you owe within the interest-free period1.

"Even when an ad says 'no deposit, no interest, nothing to pay', you still have to pay fees. For example, a $25 application fee and a $4.95 monthly fee. Your credit contract will list the fees," says ASIC1.

Buy now, pay later: As the name suggests, this involves accepting the goods or service and not making payments for the duration of the interest-free period.

ASIC warns consumers to keep a close eye on the termination of this period to avoid being charged high interest rates1.

Caution for consumers 

Glen Martin, consumer finance manager for ASB Bank told the Sunday Star Times that more than half (60 per cent) of those who sign on to an interest-free deal will find themselves stuck with a higher interest loan when the period ends2.

"The finance companies bank on the customer rolling out of the interest-free period on to a 23 per cent interest rate," said Mr Martin.

When you apply for any type of credit, it's worthwhile to note that your repayment behaviour may be noted in your personal Equifax credit report.

As your credit report is a record of your credit history, it can be used by credit providers when you make future loan enquiries - such as a mortgage - to assist them in deciding whether you would be a good candidate for credit. It is good practice to check your credit report regularly. You can get a copy with My Credit Alert, as well as monitor certain changes over time through email alerts.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.

1​ASIC, Interest-free deals. Accessed July, 2015.

2Stuff.co.nz, The dangers of showing zero interest. Accessed July, 2015.

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