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Monday, April 16, 2012

Interest Free


I’m sure you’ve seen the ads, “Buy now, pay later”, “24 months interest free”, “One low monthly repayment”.  It’s very tempting to get sucked into these deals, especially if it’s for something we think we need. I have personally used the interest free deal and found it quite useful, but I made sure that I read the fine print so that I wouldn’t pay more than necessary.  Here’s a few truths about interest free that may help you out in the future.

The card
When I applied for my interest free loan for $3500 worth of furniture (10 years ago), I merely got a statement each month similar to a credit card statement.  Now they give you a card as well.  This is so that you can use it again and run up the balance as much as you like.  But not at interest free, the rate for normal purchases is 21.74%

The fees
Yes it may be interest free for a period of time, but that doesn’t mean you pay nothing more than the price of your purchase.  For a GE money interest free loan, you get a monthly account keeping fee of $4.49 plus a $2 transaction fee if you pay your bill in a certain way.  For a 12 month interest free loan, that means you get slapped with an extra $77.88 if you pay it out before the interest free terms expire.

The minimum payment
The minimum payment per month is worked out at 3% of your outstanding balance.  At this rate, on 12 months interest free, you will only have paid 30% off your loan at the end of the interest free period. After that, they give you an outrageous interest bill of 29.49% on your remaining balance.  By now you should be in the habit of paying a certain amount each month.  If you can’t pay more than that, you may be in some trouble.  For example, the minimum payment for $5000 on 12 months interest free is around $150 to begin with and at the end of twelve months it is about $100 per month. If you keep paying just the minimum amount it will take you 61 years to pay off and you will have paid $25145.64 including $4770.15 in account keeping fees. 

The solution
Take the purchase price, divide by the number of interest free months, add the monthly fee and pay this amount or more each month so that your account is paid off before you get slapped with extra charges.

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