Have you seen the promotion signs that say ‘Interest free’ on all purchased in-store? Sounds pretty good right? Well unfortunately these buy now pay later (BNPY) arrangements can be quite costly, and I wanted to write up this post to tell you about the hidden costs associated with these types of loans.
What is an Interest Free loan?
Mrs MoneyPlant and I were in JB HiFi the other day replacing our 10+ year old plasma TV, and managed to score a pretty good deal on a new TV. The salesman mentioned we could opt to go with a 24 month interest free loan (He was actually really good to us and I was curious about these loans so I asked him to explain it) Well turns out… They are quite misleading.
Companies used to offer a ‘Buy now, Pay Later’ scheme historically known as ‘Lay-By’, have you ever heard of it? It was when you would take a product and the store would hold it for you while you paid it off, and charge you fees in the process. My Mum used to Lay-By heaps and as a young kid, I had no idea what it actually meant.
Well, the same stuff continues today, but it’s packaged up to sound way more attractive (Marketing has gotten quite sophisicated).
An interest-free loan means that instead of the company charging you a small percentage (%) of the products value in fees, they instead, charge you NO interest to simply take it home with you without paying a cent.
This SOUNDS great right? Well…
What are the hidden costs I should know about?
This is the JB HiFi Interest free finance page if you’re interested in the fine print. So let’s do a quick scenario to see how much our $2000 TV would cost us if we went with an interest free loan!
Say we signed up with a 24 month interest free loan, paying only the minimum monthly repayments. According to Latitude (who JB HiFi use as the loan provider) the minimum monthly repayments are 3% of the balance per month. We’re going to make the minimum repayments for 60 months and then for the sake of actually not having a loan forever, we’ll pay the entire balance off on the 60th month.
The first 24 months are relatively straight forward. The first repayment is around $60 per month, and eventually reduces to $30 as the balance diminishes. On the 25th month, our interest-free period expires, and the interest applied is a WHOPPING 24.99% (This is borderline criminal.. holy moley) Guess what?… YOU STILL HAVE AN OUTSTANDING LOAN AFTER THE INTEREST FREE PERIOD.
This is taken from their website incase you don’t believe me 😮
This lets you buy things on your card without paying interest during the interest-free term. You’ll still need to make a minimum payment each month though.
*Remember, paying only the minimum monthly payment won’t pay off your plan’s balance, but you can make extra payments any time.
So don’t be fooled, paying the repayments doesn’t mean you’ll pay it off within the interest free period, it just means you pay no interest for the FIRST X amount of months, and then rest is RIP.
On the 26th month, we pay 3% of the balance, which is $28, but then get charged nearly $20 in interest, effectively reducing our balance by a measly $8. If we continue to pay the minimum monthly repayments until the 60 month mark (5 years) then we are left with a balance of $660. Fortunately, we get some extra cash and pay it off immediately.
Ok, lets assess the damage done:
- TV costs $2000.
- Interest paid in the first 24 months = $0
- Interest paid between 24 to 60 months = $580
- Annual fee of $99 = $495 (Oh yeah.. there’s an annual fee on the loan haha.. you can’t make this up)
Total cost is $3070, which is over 50% more then the cost of the TV!!
You can read about the gem visa by clicking on their FAQ here
Harvey Norman have a similar structure as well with a $9 per month account fee ($108 per year)
The reason they offer you such a huge timeframe (Up to 60 months interest free in some cases) and low repayments is because they still make huge amounts of money on monthly/yearly account fees and they are hoping that most people make the minimum repayments. They aren’t doing it as a favour, If you can afford to buy the item, pay cash, and if you can’t pay cash, then reassess your purchasing decision. Maybe you don’t need the latest gadget after all? Besides.. is it really worth it?…
Being broke is expensive, so stay ahead of the game! Spent smart, save smart.