Many retailers and department stores offer interest free deals to purchase electrical goods, furniture, computers, entertainment systems and many other items. The credit is usually provided by a finance company through the retail outlet. These loans can be expensive as they have a very high interest rate for any amount not paid off within the interest free period, which can range from six months to five years.

Interest free deals only work for you if you pay off the loan before the interest free period ends. Even if you do this there will most likely be fees to be paid each month, so the credit is NOT ‘free’.

If you don’t pay the goods off on time, you will have to pay very high interest
(eg. up to 28% or more) on any unpaid amount. Some contracts may require you to pay interest on the entire amount from the date of purchase if you do not pay off the goods on time. You may also be sent a very expensive credit card as part of the deal.

Tips on interest free deals

Don't be pressured to buy

Don’t be pressured by a salesperson into buying something you can’t afford or don’t need just because it is interest free.

Shop around for goods and finance

Shop around for the best price of the goods you want to buy and check the other finance options available. You can still try to negotiate a better price even though you are using interest free finance.

Be cautious using the credit card sent to you

Often the finance company will issue you with a credit card, sometimes called a line of credit, as part of the interest free offer, with a certain credit limit. Be careful, as any purchase or transaction you make on that card will attract a very high interest rate straight away and your monthly repayments will be going towards paying off your additional purchase and the interest charges first and NOT your interest free purchase.

The credit limit on the credit card you receive may be much higher than the value of the goods you have purchased. Lower the limit on the card to match the amount of your purchase to avoid the temptation to make other purchases that will attract very high interest immediately. Consider cutting up the card as there are many cheaper cards on the market.

Do your own calculations of repayments

The minimum payment requested on your statement is not always the amount required to pay the loan off within the interest free period. Check the total cost of the finance and monthly repayments suggested by the finance company to make sure you will repay the whole amount by the end of the interest free period. Do your own calculations to work out how you can make higher repayments to pay it off in the interest free period and avoid hefty interest charges.

Check the end date, fees and charges

Make sure you know the exact date when the interest free period ends and find out the interest rate and any penalties after the interest free period expires. Check other fees and charges such as the early repayment fee, establishment fee and monthly transaction fee. You may need to add them to your repayments.

If you are required to make payments in the interest free period, and you are late in making your payments, you will be charged a late fee. If you do not pay off the late fee immediately, in addition to the amount you usually need to pay, you will not pay the goods off on time.

Keep records of payments

Keep records of all your payments and check your statements carefully to ensure your balance is reducing.

Read the small print

Make sure you read the credit contract attached to the interest free purchase thoroughly before you sign it, particularly the small print.

Check your pay out figure

To finalise or pay off your account always ring the finance company and ask for a pay out figure and how long it is valid for. It may NOT be the same amount as shown on your latest statement.

IMPORTANT: Never agree to an interest free loan unless you are certain you can pay it off in full before the interest free period ends.

Calculate paying off an interest free loan on time

Here is an example of how you can calculate to pay off an interest free loan on time.

Purchase – $1000
Interest free period – 12 months
Monthly fee – $2.95
$1000/12 months = $83.33 + $2.95 (monthly fee) = $86.30 monthly repayment.

You will need to pay at least $86.30 per month to pay off your purchase with no interest, provided you always pay on time and you keep track of any increases in the fees payable on your account.

When things go wrong

If you cannot pay the interest free loan off on time or have difficulty making repayments, get advice from an accredited financial counsellor.

If you have a dispute or problems resolving your interest free deal with the trader or finance company contact Fair Trading on 13 32 20 to find out your options or go to the Resolving issues web page to lodge a complaint.

Case study

Gael saw a newspaper advertisement for a new fridge for $1,200, no deposit and 12 months interest free. When she went to the store and applied for finance she discovered it was not a personal loan, but a line of credit card.

Whilst the cost of the refrigerator was only $1,200, she was approved for a total amount of $2,500. Some weeks later she received her credit card in the mail and one month after her purchase she received her first statement.

The statement showed the ‘minimum monthly repayment due’ as being $45 – which was 3% of the total amount outstanding. If she were to pay only $45 per month for 12 months, she would have repaid only $540 which is $660 short of the $1,200 she had borrowed. After the 12-month interest free period ended she would be paying interest on $660 at 28% per year.

The statement also indicated that she still had $1,300 available credit and, thinking she could also do with a new TV she went out and bought one using the credit card.

This second purchase wasn’t on interest free terms, as she had thought, so she was paying $1,300 at 28% per year, as well as having to pay off the interest free purchase before the 12 months period was up. The interest rate on the new card was much higher than on most credit cards.

With a line of credit you shouldn’t use the credit card to buy any additional purchases as they will attract high interest.