Many retailers and department stores offer interest free deals to purchase electrical goods, furniture, computers, bedding and many other items. While you pay for the product by signing up for credit at the retail store at the point of sale, the money is provided by a separate finance company.

The finance company will normally offer you an interest free period between 12 months and 5 years and you will have to pay the loan back either in regular monthly instalments or when the interest free period ends.

If you don’t pay back the amount borrowed (plus any fees and charges) before the interest free period ends, you will have to pay very high interest (eg. up to 30%) on any unpaid amount. Some contracts may also require you to pay interest and penalty fees if you miss payments or make late payments.

Interest free deals only work for you if you pay off the loan before the interest free period ends.

Interest free is not cost free – you will pay fees and charges!

Most people shop around and compare prices on the more expensive electrical or household items like fridges or television, but very few people shop around for finance to purchase the item.

There are many different ways of paying for the goods you buy – from cash to interest free deals, lay-by, credit card or with a personal loan. You should work out which is the best finance option for you.

Even with in-store finance there are different companies which offer different terms and conditions for the interest free deals. You should compare the different interest free deals around to see which is the best for your situation or finances. Don’t just assume they are all the same.

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All interest free deals have fees and charges. There is likely to be an establishment fee for setting up the finance and a monthly service fee. There could also be additional fees for making payments and interest and penalty fees if you miss or make a late payment. These fees are added to your account – so the finance may be interest free but is not cost free!

Be aware that using the credit card supplied to you with the interest free deal may attract fees too, such as cash advance fees, late fees or penalties, annual fees and interest.

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There are generally two types of interest free deals:

Regular monthly repayments (instalments)

You make regular payments each month to pay off the amount during the interest free period. This method allows you to budget in normal monthly expenses.

Buy now and pay later (deferred payments)

You don’t have to make payments until the end date of the interest free period – paying the full amount back plus any fees and charges.

It is important that you know which type of deal you have signed up for. Some retailers will offer both types, others will only offer one, or will use one as a promotion for limited periods of time. If you do not make a repayment when it is due you may end up paying late fees and interest.

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It is important to remember the end date of the interest free period. If you do not pay off the full amount by this date you will start paying interest on the outstanding balance.

There is no obligation for the finance company to warn you in advance that the interest free period is almost up. This date will be on the paper work you signed at the time of purchase. Alternatively, contact the finance company and ask when your interest free period ends.

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To calculate how to pay off your deal in the interest free period you need to include all the fees and charges you expect to pay in the interest free period and add them to the cost of the goods.

If you are making regular monthly repayments and receive monthly statements with a minimum repayment written on the statement, this minimum repayment amount will probably not pay off the deal in the interest free period.

Minimum monthly repayments are calculated as a percentage of the total amount owing or a minimum whole dollar amount ie. 3% or $40 whichever is greater. A suggested minimum monthly repayment is NOT the amount calculated to pay off your purchase in the interest free period. You need to calculate this yourself.

To find out how - go to Paying off the deal on time.

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If you have set up a direct debit to pay your regular monthly repayment and want to increase your repayments or make additional repayments to ensure you pay off your purchase in the interest free period, you will need to contact the lender to arrange this.

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The final amount you need to pay out is unlikely to be on your paperwork. You will need to call the lender to find this out before you can pay out the deal. The final pay out amount may be more than you thought because of the additional monthly fees and charges.

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Most customers are sent a credit card as part of the interest free deal. The credit card will usually have a credit limit higher than the amount you borrowed (the purchase amount of the goods). Be careful, as any additional purchase or transaction you make on that card will attract a very high interest rate straight away and your monthly repayments may be going towards paying off your additional purchase and the interest charges first and NOT your interest free purchase.

Fair Trading suggests you avoid using the card or you lower the limit on it to match the amount of your purchase. By doing this you guard yourself against the temptation to make other purchases that will attract very high interest immediately. You can also write to the finance company after your interest free purchase is paid off and ask for the card to be cancelled.

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If you have multiple interest free deals with the same finance company, the payment you make may be automatically directed to one of your deals rather than being split between the different deals.

Your payments can be further complicated if you use the credit card that came with the finance deal, as this will attract interest straight away and the finance company is likely to allocate your payment to the balance that is attracting interest. The contract you signed with the finance company usually gives them the discretion to determine how to allocate your payment.

If this is happening to you, contact your lender and ask them how your payments are allocated. You can then direct the lender to allocate your payments to the deal you want paid off first. However, make sure you understand the implications of this before you make the decision. Your lender may be allocating your current payments in order to save you money!

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If you have problems with your interest free deal the best thing to do is to call your lender to discuss the issue and see if you can sort them out. If you can’t resolve the problem call Fair Trading on 13 32 20 to discuss your options or lodge a complaint online.

If you cannot pay the interest free loan off on time or have difficulty making repayments you can also get advice from an accredited financial counsellor. These counsellors provide free and confidential expert advice on your financial situation.

Find an accredited financial counsellor on the Consumer Credit Legal Centre NSW website.

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If there is anything you want to clarify about your interest free deal, ask the salesperson and read the contract before you sign up for the deal.

Fair Trading research into interest free deals showed that salespeople are generally knowledgeable about the terms and conditions of these deals but don’t provide detailed information unless asked specific questions. The research also showed that the majority of people would have liked to know more about their deal before they sign up for it.

The contract is the document that explains both your obligations and those of the finance company, so reading the fine print is very important. There may also be a booklet of terms and conditions which is also important to read.

If you’ve already signed up to a deal and have questions or problems with your deal ring the finance company and speak to them directly.

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Paying by cash may mean saving up prior to buying but stores sometimes offer discounts to consumers who pay cash. Ask the salesperson if they offer a cash discount.

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This is a convenient and inexpensive way of buying goods offered by most department stores and allows you to buy a product through regular repayments. Lay-by is a good option for those who find it hard to save to buy but do not want to get into debt. With lay-by there are no credit charges to be paid but you do not get to take the product with you until you pay it off.

More information on lay-bys.

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Many interest free deals work like a credit card however, with a credit card you may only get a 55 day interest free period or none at all. Paying via credit card will cost you interest, and some will have annual fees and late fees but if you make large repayments every month and can pay the item off in a few months it can work out cheaper than interest free.

More information on credit cards.

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A personal loan is another alternative. Interest and fees are payable, which can be more expensive than an interest free deal but the loan term is usually longer than many interest free periods meaning monthly repayments might be more manageable. Do your sums to compare.

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