“Take advantage of this big finance offer! Four years interest free!” Ads promising easy finance and bargain appliances may sound like a win-win situation.
But before you head to the store to bag a bargain, get your calculator out. Interest-free deals come with extra fees that can add hundreds of dollars to your purchase.
Interest-free deals can be appealing if you don’t have the funds to pay for a product outright and – provided you meet repayments – are cheaper than paying off the debt on a credit card. Getting approved is quick, the ads claim. Do it in-store or online before you start shopping.
What isn’t in the 70-point type in the flyer delivered to your mailbox are the set-up and annual fees interest-free offers attract (see our table).
As well as the set-up cost, most interest-free finance deals sting you with a yearly service fee. These annual fees mean the longer you take to pay-off your purchase, the more you’ll pay overall.
For example, sign up for a 48-month interest-free deal on a $1847 clothes dryer from Harvey Norman and extra fees will add more than $250 to the purchase price.
At Freedom Furniture, putting a $1999 two-seat sofa on a 36-month interest-free deal results in you ultimately shelling out $2207.
Like all finance deals, there are potential pitfalls in the fine print of interest-free offers. Fail to make repayments on time, or at all, and late payment fees and high interest rates could see costs skyrocket and turn your deal into an expensive lesson.
Miss a repayment and you’ll be whacked with a $15 late payment fee with these finance options offered by the big chains. Finance Now and Smiths City also hit you with a default interest rate several percentage points above the standard rate. Q Card and Farmers Finance reserve the right to charge default interest though say it's not applied at present.
Minimum payments are another potential banana skin. The minimum monthly repayment amount required under the finance agreement may not be enough to pay off your purchase during the interest-free period.
Failing to clear your debt within the interest-free period can prove costly. The interest rate that kicks in is higher than bank credit card rates. For example, leave money owing on your Gem Visa – a finance option offered through retailers such as Harvey Norman and Noel Leeming – and you’ll pay an eye-watering 25.45 percent per annum.
Gem Visa’s monthly statement includes both a minimum monthly payment amount and a “payment to reduce further interest” amount. The latter shows how much you need to pay that month to reduce or avoid interest in the future.
With Q Card – offered through stores such as Big Save Furniture and 100% Appliances – statements show only a minimum monthly repayment amount. Repayments are split to meet the minimum due across all fees and purchases, depending on which has the highest interest rate or expires first if rates are the same.
If you have more than one interest-free purchase on the go, you need to make sure repayments are enough to cover all purchases. When you sign up for an interest-free deal, ask the company to calculate how much you need to pay each month to settle the debt within the interest-free timeframe.
Some retailers make interest-free offers more attractive by offering finance cards. These cards can be used at multiple retailers and offer longer interest free periods and payment holidays than a standard bank credit card.
Gem Visa and Q Card are the most common finance cards promoted with interest-free deals. Gem Visa is provided by Latitude Financial Services. Q Card is provided by Consumer Finance, part of Fisher & Paykel Finance.
Other interest-free offers on the market include those through Farmers Finance, Smiths City Finance and Finance Now. You sign a contract for each purchase and pay it off in fixed monthly instalments. Fixed instalment plans can also be set up with Q Card, Gem Visa and a Farmers Finance Card.
As financial service providers, these companies must belong to a financial dispute resolution scheme and tell you how to contact the relevant scheme. If you have a complaint that you can’t resolve with the company, you can take the matter to the resolution scheme free of charge.
Lenders must give you key information about the terms of a finance contract before you sign. This includes fees, the interest rate and the total amount you’ll pay. Fees must be reasonable. You have a cooling-off period of five working days to cancel the deal after receiving the initial disclosure. If the information is emailed or faxed, the cancellation period is seven working days from the date sent. If it’s posted, the period is nine working days from the date mailed. If you cancel within the cooling-off period you may have to pay fees and interest in some instances. And you’ll still have to pay for the purchase if you’ve taken possession.
Even if you’re just shopping around, lenders have to make information about their standard terms and costs of borrowing available on their websites and in-store. Of the retailers we visited, Smiths City didn’t provide this information. As a result of our inquiries, the Commerce Commission said it will now be reviewing the company’s website.
Report by Kate Sluka.