How Interest Free Loan REALLY Work…

Interest free loans can work in a number of different ways:

Pay by instalments – regular payments are required each month.

Buy now, pay later – you are not required to make any minimum repayment.


MINIMUM PAYMENTS – In most instances the minimum repayment will not be sufficient to repay the loan during the interest free period. If you wish to repay the loan within the interest free period you will need to make additional payments each month.

BE AWARE: In some instances you will need to make arrangements with the financier to make these additional payments otherwise the additional amount may be held in credit against future minimum repayments.

INTEREST RATES – Interest will start to be charged at the end of the interest free term, usually at a very high rate. It is not uncommon for these interest rates to be in the high 20%s or even higher.

BE AWARE: Worst still is that penalty interest may be charged for not paying the balance off within the interest free period.

PAYMENT DEFAULT – If you default on the loan (eg miss a repayment during the interest free period) it is not uncommon for the loan to cease being interest free with commercial rates of interest being charged moving forward.

TIP: It is best to set up regular direct debts from your bank account to ensure that all payments are made on time.

NO DISCOUNT – Ever notice that when you buy an item with an interest free loan that the retail attendant will never discount the purchase price? This is because the retailer is not generally the financier and there is a third party. The retail store will normally share a percentage of the sale price with the financier to ensure that the financier receives some payment in the event that you repay the loan within the interest free period.

HIGH FEES – Even though there may be no deposit and interest, most loans do charge application and monthly fees.

BE AWARE: It is not uncommon for these monthly fees to be $4.95 per month, being nearly $60 per year.

COMES WITH A CREDIT CARD – Some financiers offer a credit card with the loan to tempt you to spend more.

BE AWARE: Most of these credit cards have interest rates significantly above other credit cards available in the market.


WORK OUT THE NUMBERS – Ask the retail assistant what discount would be available for a cash sale then determine the monthly charges to calculate how much the interest free loan will actually be costing you.

REPAY DURING THE INTEREST FREE PERIOD – Make sure you repay the loan IN FULL within the interest free period to avoid default interest or extremely high rates of interest.

If you REALLY, REALLY need the item and have a mortgage, an option MIGHT be to redraw the amount as your home loan should have the lowest interest rate. BUT PLEASE, PLEASE BE AWARE that unless you pay additional monthly payments and have the goal to pay this portion off as soon as possible, you may actually be adding this debt to your 20 year home loan. And that will not be a good decision.

If you are struggling with your credit card and store card debts we recommend you call us for a full finance review before you consider taking on any more debt.

It is always wise to call our office before considering any new debt. We will let you know about all the hidden and long term costs of interest free and other loans to make sure you understand the consequences of your decisions.

Interest free doesn’t mean cost free

Tempted to buy that new lounge, home theatre system or television but don’t have enough money to pay for it right now?

Before you sign on the dotted line for in-store interest free finance, think carefully and read the fine print. More importantly, do your research! Well… we have done this for you!

Many retail stores offer interest free payment terms, especially during the end of financial year sales. But beware! These ‘interest free’ deals that allow you to take your goods home and pay them off over time aren’t always cost free!

Choices, choices, choices

Not only can you get ‘interest free’ store purchases, there are ‘interest free’ credit cards and ‘interest free’ loans – well ‘interest free’ within a certain timeframe that is.

They all have their own features, benefits and pitfalls.

Usually with in-store interest free deals, you are provided with a store card or credit card with a credit limit to cover the cost of your new purchases. These deals typically have a higher limit than the goods you are purchasing.

It is not uncommon for stores to offer various interest free deals as they really want your business. Their range of options attracts different clientele. We have seen the mega chain store giant, Harvey Norman, offering seven different interest free options at one time!

And of course there are the buy-now-pay-later options with Afterpay, Zip Pay and the like (that’s a whole other topic) that have very similar features. However these options also require thorough consideration before taking action.

Did you say 29% interest rate?!

Retailers have different offerings and their payment terms will vary, so it is important you read all the conditions for each loan option as they will differ.

For example, the interest rate you will be charged if you haven’t repaid the balance by the end of the interest free period can be as high as 29%. That is even higher than most credit cards!

Make sure you calculate your regular payments to ensure the balance is paid off before the end of the interest free period. It is wise to set up automatic direct debits so you don’t miss any payments. This case study by ASIC’s MoneySmart shows you why.

Case study: Ron and Maya compare interest free deals

A young couple, (Ron and Maya) discussing interest free deals, both got interest free deals but for different amounts.

The interest free deal worked out well for Ron as he increased his repayments to pay off the deal in time.

But Maya just left her repayments at the minimum amount and ended up being charged 29% interest and still owed a lot at the end of the interest free period.


Purchase $2,000 couch

Interest free period – 12 months

Repayments – $200 monthly

After 12 months – Fully paid off

Outcome – Happy with the deal

Maya’s deal

Purchase – $1,500 fridge

Interest Free Period – 12 months

Repayments – Minimum repayment

After 12 months – Paying 29% interest on a $1,000

Outcome – Stressed with more debt

If your interest free deal comes with a credit card – BEWARE! Additional purchases won’t necessarily be on the interest free terms and you could end up paying high interest rates on those additional products immediately. Plus, there is always the temptation to buy ‘something else’ with the remaining credit available.

Nothing to pay! No deposit! No interest?

Sounds too good to be true? Well it usually is. These catchy headlines may draw you in-store or online but there are fees associated with your shopping that may include application, processing or account keeping fees.

Interest free finance arrangements can be a great way to reward yourself with some of the finer things in life – or even practical purchases like appliances when you are home making. But these arrangements are only beneficial for those who are regular on-time payers. Otherwise you may find yourself just like Maya and stressed with more debt – and of course we don’t want that!

Remember: every credit application, loan, credit card AND interest free deal you have will go on your credit report and can affect your future borrowing power. Many Australians take out interest free finance without realising it is actually a loan and the penalties in the end can be high.

We leave you with two key thoughts on interest free shopping:

1. You have to be able to afford the repayments and ideally pay the item off before the interest free period expires. You don’t want to put extra pressure on your cash flow.

2. If you only pay the minimum monthly repayment you won’t have your purchase paid off by the end of the interest free term and you will be slugged with high interest and more fees.

If you are one of the 1.6 million Australians who already have 3 or more credit cards, perhaps another interest free deal isn’t for you! Saving or the good old fashioned lay-by may be the answer.

Before you are tempted into interest free shopping, please call us, even for those new small debts. We can help you make the right decision to reward yourself now and in the future.