woman shopping for fridge

Why interest-free deals can be expensive

“I saw an ad touting a 60-month interest-free deal for a new fridge. It looked like a good offer, but then I discovered I had to pay an establishment fee – which wasn’t immediately obvious – to take up the deal. What do you think of these offers and is the way they’re advertised legal?”

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Interest-free offers can be enticing, particularly if you don’t have the readies or want to spread payments over time.

But while they’re interest-free, they’re seldom fee-free – and these fees can quickly make the deals much less attractive.

How the fees can add up

Take a $1250 fridge advertised on a 60-month interest-free term. Both Harvey Norman and Noel Leeming offer these deals through Gem Visa. However, to take up the offer, there’s an establishment fee of $55 and an annual $52 card fee. Over five years, these fees come to $315. Your $1250 fridge has now cost $1565.

If you miss a payment – or don’t pay off the purchase within the interest-free period – you’ll have to open your wallet a lot wider. Late-payment fees and high interest rates can turn the deal into a financial albatross. The interest rate on a Gem Visa is an impressive 25.99%.

What are the rules?

While interest-free deals are promoted in headline ads, the fees involved in taking up the offers are not always as easy to spot.

Traders must comply with the Fair Trading Act, which means they can’t mislead consumers about the price of goods.

Companies offering finance deals must also comply with the Credit Contracts and Consumer Finance Act, which requires advertising to be responsible. The Responsible Lending Code is supposed to provide guidance for lenders on what that means in practice.

The code says if an ad describes a loan as “interest free” but an establishment fee is charged, then the amount should be disclosed. Lenders are also expected to state the total amount payable under the loan if they’re referring to the cost of paying weekly or fortnightly or to other regular repayments.

But the code stops short of advising lenders on how prominently this information should be displayed. Moreover, the code isn’t binding on lenders – it’s just a guide.

We’ve been calling for tougher rules to clean up credit advertising and ensure consumers get the full picture about the cost of buying on credit. In our fridge example, we think the $1565 price customers would pay if they bought on tick should be prominently displayed.

Change is on the horizon. The government has announced it will introduce mandatory standards for credit advertising. These standards would set out the requirements lenders have to meet, and there would be penalties for breaching the rules.

In our view, these changes can’t come soon enough.

Cancellation rights

If you buy an item on credit – whether it’s a new fridge or a car – you have a "cooling-off" period of five working days to cancel the deal after you’re handed the written disclosure statement. This statement sets out details of the loan including your repayments, the interest and fees.

However, be aware if you’ve already taken possession of the goods and want to cancel the credit agreement, you still have to buy the items – so you may have to arrange alternative finance.

If the product isn’t of acceptable quality and you reject it under the Consumer Guarantees Act, the retailer can be held liable for the loan. You can apply for an order from the Disputes Tribunal formally transferring your obligations to the retailer.

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