By Rebecca Styles
Research Lead | Hautū Rangahau
Ads promising interest-free deals at retailers can sound like the perfect solution. You can buy what you need and have lots of time to pay it off – we’ve seen ads offering as much as 50 months interest free. But if you don’t pay the loan in the interest-free period, you could end up with a big interest rate and fees.
Interest-free deals can be appealing if you don’t have the funds to pay for a product outright. And provided you meet the repayments, they’re usually cheaper than paying the purchase off with a credit card.
Big box retailers typically offer finance deals in conjunction with Gem Visa, Purple Visa, Finance Now, and Q Mastercard.
However, while the deals may be interest free, they’re seldom fee free. As well as a fee to set up the contract, most interest-free finance deals have a yearly service fee.
The real cost and fees
Is it really interest free?
Yes, if you pay it all off within the interest-free period.
When you’re signing up to the deal, make sure you’re paying enough to ensure the total price will be paid off in the interest-free period (including any establishment fees and annual fees).
Some finance cards will require a minimum monthly payment, but this is unlikely to be enough to pay the loan off in full in the interest-free period.
Some interest-free offers will require equal monthly payments to ensure the total is paid off within the interest-free period.
What are the fees?
There are fees for setting up the loan, usually called an establishment fee. Of the deals we looked at available at various retailers, this fee ranged from $55 to $65.
An annual fee will also apply. These can vary between $37 through to $65, depending on the card.
Late payment fees will also apply if you don’t make the payment on time. These range from $10 to $15.
With some finance products, the provider may charge a default rate of interest if you miss a payment. Basically, this means you’ll be charged more interest for missing the payment.
The default rate should only apply to the amount outstanding (not the entire loan) and must reflect the legitimate costs to the business of chasing the payment up.
What is the interest rate after the free period ends?
The interest rate applied once an interest-free finance period ends varied from 19.75% to 29.49% for the finance cards we surveyed. This is around the same range as for a standard credit card.
What happens if I miss a payment?
Miss a repayment and you’ll be charged a late payment fee, which can range from $10 to $15.
Can I pay the price off early without penalty?
Yes.
Black Friday
Which deals are really worth your money? With big sales being promoted this Black Friday, it can be easy to get caught up in the hype. Check out our tips, advice and product tests to help you get what you bargain for.
Working out the total cost
Use this calculator to plug in how much a product costs, the loan period and any additional fees to see how much the loan will cost you over the interest-free period.
Here’s a few examples of how much you’d end up paying for a product, over and above the sale price at a few big retailers, if you paid the loan off within the interest-free period.
Gem Visa
Product purchased: Perfect Fleece King bed – $4,199
Deal: 50 months interest free
Additional fees: $55 establishment fee + $65 annual fee
Difference between product price and total cost of the interest-free deal: $380.00
Total cost of finance deal: $4,579.00
Monthly payment to avoid interest: $91.58 a month
Interest rate after interest-free period: 29.49%
Farmers Mastercard
Product purchased: Luca Furniture Hendrix leather three-seater sofa – $2,399.00
Deal: 50 months interest free
Finance product: Farmers card or Q card
Additional fees: $55 establishment fee + $50 annual fee
Difference between advertised price and finance deal: $305.00
Total cost of finance deal: $2,704.00
Monthly payment to avoid interest: $54.08 a month
Interest rate after interest-free period: 28.50%
Purple Visa
Product purchased: Apple iPad Air 13-inch – $1,299
Deal: 12 months interest free
Finance product: Purple Visa
Additional fees: $55 establishment fee + $55 annual fee
Difference between advertised price and finance deal: $110.00
Total cost of finance deal: $1,409.00
Monthly payment to avoid interest: $117.42 a month
Interest rate after interest free period: 26.65%
Find out the truth
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Can I change my mind about the loan?
You have the right to cancel your loan before it starts, but the timeframe for doing this will differ, depending on how you got the loan agreement.
If you were given the loan details (called disclosure documents) and contract instore, you have 5 working days to cancel your loan by getting in touch (in writing) with the finance card company.
If the documents are emailed to you, you have 7 workings days, and if they’re sent by post, you have 9 days.
Bear in mind that the finance card company may charge you any reasonable administration fees to cover the cost of setting up and cancelling the loan.
You also need to be aware that if you cancel the loan agreement, and you’ve received the goods, you’ll have to find another way to pay for them, unless the retailer decides to take it back.
If you haven’t received the product, you can cancel the credit contract and the purchase.
What are my rights when taking out an interest-free deal?
Lenders must make information about their standard terms and the costs of borrowing available on their websites and in store.
Before you sign a contract, they must also give you key information about the terms of the loan. This includes the fees, interest rate and total amount you’ll pay (this is called ‘initial disclosure’).
If the lender isn’t treating you fairly, or hasn’t met its side of the bargain, you can make a complaint to a financial dispute resolution scheme. All lenders must belong to a dispute scheme and give you details of how to contact the scheme.
