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.
So are you curious as to what they really mean? Well read on, and we will do our best to help explain!
Interest Free Loans
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:
- Not have to make a single repayment for 15 months
- Not have to pay a deposit
- Not have to pay any interest on the $2,000 for the 15 months
- Have the goods straight away
BUT the rest of the picture is:
- After 15 months you will then be charged interest at a rate of 29.99%
- You will then have to make monthly repayments determined by the store
- There could be an annual fee (as much as $99) that you must pay each year
- There are often other fees chargeable such as if you miss a payment
- You may have to pay for the furniture to be delivered
This also goes for credit cards that offer an “interest free” transfer period.
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:
- Save paying around $950 in interest if it’s a 12 months balance transfer promotion
BUT the rest of the picture can include:
- If you purchase anything else on your card it will get charged standard credit interest
- Any part payments you make go to the interest free outstanding balance first, so you effectively don’t repay any of the new amount that is getting charged interest
- You may actually lose your interest free period entirely if you make additional purchases
- Once the balance transfer period/promotion is over, the outstanding balance can often revert back to an interest rate higher than the normal credit card interest rate
Our top 3 tips for interest free deals
- Make sure you read the credit contract and understand ALL the fees and charges for the entire term of the deal
- Check to see if you can pay extra payments to clear the debt quickly – some store deals actually won’t let you
- Make sure you know when the interest free period finishes – the lender won’t remind you!
0% Interest Loans
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!
Our top 3 tips for 0% interest loans
- Shop around and get a good understanding of the true value of the car.
- Don’t be forced into signing a deal. Dealers will often tell you it’s a limited offer to add extra pressure.
- Talk to a finance professional outside of the car yard to see what other finance options are available.
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.