In Australia we know we live in the “lucky” country. But as lucky as we are, it doesn’t mean we get money for free. The very clever people in marketing are therefore always looking at ways of making something sound as though it is for free, even though it really isn’t. This is where the terms “interest free” and “0% Interest” come in to play.
You will often see furniture stores or credit cards advertise “interest free”. For example, a furniture store offering an “interest free” loan that has no repayments for 15 months and no deposit. WOW! Sounds incredible! The key is to understand the whole picture. If you were to take this deal and borrow $2,000 for furniture you would:
BUT the rest of the picture is:
It is a great saving if you can transfer your existing credit card debt (which is getting charged at a higher interest rate – let’s say 19%) to an interest free card. If you had a balance of $5,000 you could:
BUT the rest of the picture can include:
Another clever marketing trick that is used a lot by car dealers is 0% interest loans. When you buy a car, generally you can negotiate a price with the dealer. With the 0% interest loans, you rarely can get the price reduced. This is because the price of the car has already been set so that some of the total amount will still go to the “0%” lender. If you don’t choose the 0% loan and negotiate the car price, then by even getting a loan at 7% it’s possible you could pay less overall. Here is an example to help explain.
0% FINANCE DEAL VS 7% FINANCE DEAL
Purchase Price (set) $25,000 Purchase Price (negotiated) $22,000
True value of car $22,000
Your total in repayments (3 years) is $24,815 to “7%” lender (with $2,815 interest paid) vs $3,000 for the 0% deal.
In the 7% finance deal, the lender gets paid via the $2,815 interest. In the 0% deal, the lender gets paid via a lump sum payment of $3,000, which is called “sub-vented finance.” So as you can see, the lender still gets money one way or the other!
At Fair Go Finance we are happy to discuss our personal loans with you, and make sure you understand everything clearly. Personal cash loans can be used to buy a car, refinance a car, repair a car or even to help cover your registration and insurance. If you would like to find out more, please call us on 1300 324 746.