Interest Free Terms - Good Or Bad?

Interest free terms - you see it on TV advertisements, the sales attendant tells you about when they're trying to convince you to make the purchase, everyone’s doing it and it’s making major purchases so much more affordable....but is it good or bad?

When I was growing up, I remember my parents saying “if you can’t afford it, don’t buy it”....how things have changed. We now live in a society where we live beyond our means and high personal debt is an accepted way of living. People live on credit and the banks are more than happy to support the trend with increasing credit limits, new cards, competitive interest rates etc because they’re the ones that benefit the most.

Now you can go one step further and purchase high value items on interest free terms. All major retailer offer consumers the ability to buy now and pay later….and its interest free. The process is actually fairly similar to obtaining a credit card and as you pay down your outstanding balance, you actually accrued available credit which can be used for future purchases!!

Interest free terms can be a great way to finance your purchases as it provides you with the opportunity to spread a large amount over the interest free period which is great from a cash flow point of view and doesn’t attract the high interest rate that your credit card may attract......as long as you pay the entire balance within the interest free period.

That’s the catch.....if you make a purchase using interest free finance and then don’t pay the entire balance within the allotted period, be prepared for a nasty shock. Once you go beyond the interest free period, the balance outstanding will attract a high interest rate and possibly additional fees and charges.

This financing option definitely allows people to live beyond their means and I believe this can be very dangerous. The whole mentality of buy now and pay nothing for x number of months may lead some people into a situation where they spend and spend and spend and then when it's time to pay up, they can't manage the repayments. That's where the finance company makes their money - your outstanding balance now becomes interest bearing.

I personally believe that interest free finance is great but I know it's limitations. I say that because when we make a major purchase, we make the purchase knowing full well that we are committed to repaying the amount in full and on time so that we don't pay any interest. We work out the amount payable and the interest free period and then budget to make the required amount each month until paid before we commit to the purchase. That is the key to using this type of facility successfully - enjoy the cash flow benefits and don't pay interest, great!!

Recently, we bought a LCD TV on 18 months interest free terms from The Good Guys and then followed that up with a new TV unit from Freedom on 12 months interest free, thanks to our friends at GE Credit Line. Even before we made these purchases, we had worked out the estimated monthly repayments required and factored them into our budget so that we were fully aware of our commitment and knew that we could fit them into our spending without creating too much additional strain.

Interest free terms - good if you're in control of your finances, bad if you spend without realising that tomorrow will one day be today.

Cheers,

Rhys Campbell

About the Author:

Rhys Campbell is a Chartered Accountant residing in Australia with over 10 years experience in Finance and Commerce worldwide. Visit http://www.easy-budgeting.com/Download.html to download the EasyBudgeting Personal Budget Planner.

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