Spending money you don’t have can be a dangerous game. Many retailers offer special deals to tempt buyers to purchase products now rather than later and one example of this is interest free finance.
Interest free finance is when a retailer lets you take products home before you pay for them. Retailers team up with a finance company to provide ‘buy now, pay later’ finance. You may often hear the term ‘No deposit and 2 years interest free’ or something similar on the radio or TV and this is an example of interest free finance.
What some people don’t realise is that an interest free deal is actually a loan. Although initially you don’t pay anything, once the interest free period has ended, you will be making repayments (with interest) to pay off the amount owing and store cards often have a higher interest rate compared to other credit cards. Another danger with interest free finance is that you will have to fill out a credit application and the finance company will look at your credit file, which means an enquiry will be left on your credit report, even if you are declined. This can have an impact on your borrowing power if you decide to apply for a home loan or another loan in the future.
There are usually two options for interest free deals. Either, you make regular monthly repayments during the interest free period or you have a deferred repayment period where you don’t have to make any repayments until the end of the interest free term. One of the biggest dangers with interest free deals is that consumers don’t take advantage of the interest free period. Even if you have a deferred repayment deal, you should still aim to pay off the full amount before the interest free period ends. This way you avoid paying an excessive amount of interest.
Interest free finance often catches consumers off guard as they are usually marketed to sound better than what they actually are. So, before you apply, make sure you have a clear understanding of all the terms and conditions to ensure you are not the one who loses out.
Tips before applying for an interest free deal
• Try and avoid using credit for consumer purchases – it is safer to spend money you have
• Consider using lay-by
• Calculate whether you would be able to afford the repayments after the interest free period ends
• Make sure you have a clear idea about what the fees, charges and interest rate are once the interest free period ends.
• Create a reminder for when the interest free period ends
• Repay the full amount before the interest free period ends
• Do not increase the credit limit
• Do not apply for multiple interest free deals – every time you submit an application, it will create an enquiry on your credit report, which can affect your borrowing power when you apply for credit in the future.