These days we are exposed to an increasing number of television and newspaper advertisements for “interest free” or “buy now, pay later” offers. These types of promotional products are usually offered by major retail chains such as Harvey Norman, Domayne and Freedom Furniture. These stores sell the latest-and-greatest homewares and electrical products, from lounge suites and bedroom settings to plasma televisions and surround sound stereo systems.
In essence, financial agreements established with these retail chains can be likened to an “interest free” loan. Whilst the “loan application” is submitted via the retail operators, the loan will be linked to a finance company. In Australia, it is more than likely that the finance company will be GE Money, which is responsible for both the Buyer’s Edge and CreditLine lending programs. Financial institution, HSBC, also introduced a similar “retail lending” product earlier this year. For these types of “loan agreements” the terms are usually between 6 and 24 months.
In most cases these “interest free loan” products are also linked to a store credit card. There are various versions of store credit cards that exist in the market at the moment with different conditions depending on which store you purchase from and which product you sign up for.
Some examples of different types of store credit cards include the Coles Myer Source card, the GE Money GO MasterCard and the David Jones card. The Coles Myer and GE Money cards are referred to as “dual cards”. This means that cardholders can take advantage of specific in-store “buy now, pay later” or “interest free” promotions but can also use it as they would a credit card, to make purchases at various other locations. Conversely, the David Jones card is a traditional store credit card, in that it can only be utilised within David Jones stores.
The two most common versions of this type of promotional offer are described as:
1. “Interest free” – this arrangement requires the purchaser to make regular monthly payments over a specified period.
2. “Buy now, pay later” – with this offer the consumer is not required to repay the full cost of the purchase until the end of the promotional period. What is not always made obvious in the promotional advertising is that the purchaser is still required to make minimum monthly repayments in addition to an ongoing monthly “account keeping” fee prior to the end of the specified period. Additionally, higher repayments can usually be made if the consumer so chooses.
For consumers looking to get the latest technology or the newest trends but cannot afford to purchase them outright, “buy now, pay later” plans and “interest free offers” can provide an achievable alternative.
One of the main points to remember is that if the full purchase amount is not paid off by the end of the specified period the outstanding balance immediately begins to accrue interest charges. Most of these retail “loans” have an interest rate of between 25-30 percent so it is important to be diligent with repayments in order to avoid any unnecessary and unwelcome charges. Be cautious and ensure that you crunch the numbers for your particular agreement, as in most cases simply paying the minimum amount every month will not see the bill settled in time. It is wise to make regular monthly repayments rather than leaving it until almost the end of the term and hoping that you have a lump sum of funds to pay it off in time.
It is also important to be aware of any extra fees that are associated with the product that you sign up for as some have monthly account fees and even one-off establishment fees in some cases.
If you feel that you may not be disciplined enough to make the repayments in time it may be a good idea to look at taking out a personal loan through a financial institution instead. The interest rates for unsecured personal loans are generally much lower than those charged on the “buy now, pay later” plans.
Another alternative may be that you have a low-interest account that you can transfer the outstanding balance to at the end of the term, to avoid paying the inflated rates.
One of the other traps to be aware of is related to multiple purchases. Once you are issued with a store card it is at your disposal to purchase multiple items from various in-store promotions. This complicates the repayment process somewhat as it is not possible to direct your funds to a particular loan. This is a risky choice, particularly if you are not 100 percent confident in your ability to correctly calculate owed monies and associated costs, and could result in a lot of unnecessary extra fees and charges. Again, if you are looking to make multiple purchases it may be wise to explore the option of a personal loan.
The team of accountants at The Quinn Group are available to offer financial and accounting advice to individuals and business. If you have a query or would like more information please contact us on 1300 QUINNS or click here to submit an online enquiry form.