Buy Now, Pay Lots More Later
Paying nothing for 6 months or more sounds like a great deal, but stores would not offer it if they (or their associates) were not making money from it. We explore how you can avoid them profiting at your loss.
So how do they make money out of these interest-free loans?
As a rule of thumb, borrowing money always costs money - and if it sounds too good to be true then it probably is.
Most of the money is made because people do not pay the balance of the loan off before the due date. When the interest-free period expires, the loan becomes subject to a high level of interest, around 30%, which is significantly higher than most credit cards!
There are an abundance of possible fees and charges including:
- Fees for paying the loan out early;
- For making additional payments;
- Establishment fees;
- Monthly account keeping fees; and
- Late fees.
Many of these offers will also have a minimum purchase price, that you must meet before you are entitled to any financing. This is to encourage you to buy more to qualify for the loan (and the larger the amount, the more difficulty you are likely to have in paying it all back on time.)
As with most forms of credit, the terms and conditions are structured to favor the lender and not you, the consumer. However, an awareness of these conditions and a little bit of forethought can save you a bucket-load of cash.
Before taking out any sort of loan, there are some vital questions to ask:
- Establish the total amount that your loan is for. This is a question that you should ask your lender and have confirmed in writing where possible.
- Figure out the monthly repayments, don't trust the stores word - divide the cost of your purhase by the number of interest-free months and decide if you can pay that much every month. It's not uncommon for their repayment amounts to be smaller than those needed to pay off the loan before incurring interest.
- Take the loan details away with you to read carefully and think about, rather than being pressured to sign anything in-store. Check to see what all of the fees are, and ensure that you understand the terms of the agreement before signing.
- It is often better to go elsewhere for finance if you go ahead with the purchase i.e. not through the store. Going to a bank for a personal loan will be cheaper, with a lower interest rate and fixed repayments, rather than taking our the interest free loan but not repaying it on time.
How to best deal with a loan:
- Plan out your payments so that there are no rude surprises at the end of the interest-free period;
- Try and pay off one loan before taking out another, that way you'll have one less payment per month and less chance of ending up in debt trouble if something goes wrong.
It is really important that you don't miss the date by which the loan has to be paid!
In order to avoid this you should set up a series of reminders for each payment, so you can keep on top of your repayments. (All of these types of loan work on the fact that people are busy and disorganised and forget some payments.)
These sorts of reminders can easily be set up an automated using a system like Budgets Get Real,which can remind you of how much needs to be paid and by when. Not only can you set reminders but you can plan how you are going to manage your repayments, as well as the rest of your budget and expenses.
What happens if I can't pay off the loan?
That will depend on the conditions of your loan, but it would be wise to try and apply all possible resources to fixing it up, to reduce the outstanding amount (including interest). Due to the way that many of these loans are calculated, the interest can be a huge expense.
The day after an interest-free period expires on a loan on a $2000 purchase, the total amount owing could be as great as $2,600. (This assumes that the initial item cost was $2000 and that the no-payment period was 12 months at 30% interest.)
This is not an uncommon problem as it is estimated that three-quarters of the people who take out this kind of finance don't get anywhere near paying it off before the end of the interest-free period. If you don't pay every cent owing by the due day (including fees and charges) you may be charged interest on the total amount of the loan (at 30%) from day one.
With fees like this, it is worthwhile to use any means possible to pay this loan first.
Click here to view associated tip
September 19 , 2006
Article contributed by Budgets Get Real
| Member Login |
|
|
Want more money to spend? |
Discover how |
Get your FREE Clever With Cash Membership
to access ALL of our resources.Get the resources that only members can see -
Special Reports, Tips, Tools and more.Join now to access all of our free Personal Finance Resources.
