Interest Free Loans

interest free loan

It is human nature to want things we cannot afford. That’s why we need to budget and save.
However if you actually need a new washing machine, not just want one, then consider interest free loans if you cannot wait to save. Consumer loan lenders or loan companies say interest-free shopping is smarter and cheaper than using a credit card or taking out a personal loan for big-ticket items such as furniture, white goods and televisions. That’s because if you pay off your purchase within the interest free period, you won’t pay any interest, and you have perhaps taken advantage of a sale, or discount on the item purchased.

Interest free retail promotions have become popular ways to buy more expensive items as you can spread the cost over a longer period, often up to 36 months. GE Money managing director Greg White said more than 80 per cent of its customers never pay any interest because they pay off the full purchase price within the interest free period.
Interest free is not a debt trap, Mr White said. A total of 300,000 GO Master Card customers did not pay any interest in 2000 and 70 per cent of those customers later bought another product using the interest free option.
However, an interest rate does kick in if you haven’t paid off the full amount within the set period, and that is normally quite high, so when taking advantage of interest free loans, make sure you have still budgeted to pay the full amount off within the agreed time frame; or else it could cost you more than you first planned, and you may be looking at a debt consolidation loan to get you out of strife.

Most loan lenders and finance companies will insist you set up a direct debit from a nominated bank account to ensure the purchase is paid off in the interest free period.
Ironically Gerry Harvey the CEO of the retail giant of furniture and electrical retailer Harvey Norman, is not a fan of interest-free deals, despite his stores offering them, and as with many retailers use GE Money as the loan lender to set up the interest free loan.

“No way, I will always pay for things in cash,” Mr. Harvey said. “I’ve never bought anything on a time-payment, whether that’s a motor car, house or fridge. I won’t buy anything unless I have got the cash money to spend. “My view is, if you can afford it, always pay cash, that way you haven’t got that constant blood sucker coming out every week or fortnight.”

That said, the charismatic billionaire has been offering these finance packages to his customers for years. “People tell me all the time that they are on their fourth or 21st interest-free purchase. But the ones that write us letters and are very unhappy don’t pay, and get hit with the penalty interest rate,” he said.

“It is pretty hard to be too sympathetic if they’ve had two years or 50 months interest free and they still have not paid it off. What the hell do they expect?”

Current interest rates for these types of deals depend on the finance company but can be about 29 per cent after the interest free period ends. Typically, loan lenders receive a payment from the retailer of between 1 per cent and 21 per cent of the purchase price for providing the interest free period. In addition to this transaction, they also get an introduction to the retailer’s clients.

“We pay GE a certain amount of money, depending on the deal, and they then (also) hope to sell these customers insurance and other loan products, car loans, boat loans,” Mr Harvey said.


Types of interest free loans

There are basically two different interest free loan types, and do have a difference with regards to the way repayments are made.

  1. Interest free
  2. Minimum monthly payments are needed. These won’t pay out the whole amount within the interest free period but you can choose to pay more without penalty.

  3. Buy now pay later
  4. No monthly repayments required. As long as you pay out the amount within the interest free period, you will not pay any interest. You can choose how often you make repayments within the interest free period.

There are some myths in the market place with regards to interest free loans: If you fail to pay off within the interest free period, interest is backdated to the original purchase date and is calculated on the original purchase price. This is not true, interest is only calculated after the expiry date and only on any remaining unpaid balance.

Depending on your situation and the amount of money you are borrowing; you may be better taking out a small unsecured personal loan, or secured personal loan, and it would be a good idea to discuss this with your financial professional to see what will be best for you taking your unique situation into account before doing so.

Some people that have got themselves in trouble with the buy now and pay later deals often look at debt consolidation loans, and combine existing personal loans and credit cards so that they are only paying one monthly repayment; which will be lower than the existing commitments combined, and at a lower interest rate.

In summery interest free loans can be a great way of getting what you want, or need now and paying later, but there are pitfalls for people who do not budget their money monthly.