Wednesday, 30 March 2011

"Interest Free" not as interesting as it sounds

I am interested in interest, and my interest in interest was recently piqued when I saw a promotion for Sydney's Furniture & Bedding.
Free for 28 months! Sounds wonderful. Nice one Sydney! I've never shopped there myself, but I am told that their furniture is great. Perhaps I should check them out. But hold on a sec, what does that incredibly small asterisk next to the 28 signify? I'd better check the small print. After all, I suppose there is a slight possibility that there could be fees and charges that aren't prominently displayed in the massive banner advertisement.
fees and charges apply and are available on application

My interest started to wain, so I instead visited the website of Australia's biggest provider of interest free terms, Harvey Norman, where they are a little more forthcoming.

So what is the deal with these deals?

Take this hypothetical but imminently realistic situation. I wander into my local Harvey Norman and purchase a $1,000 computer.

"Sir, would you like to take advantage of our 500 days interest free offer?"
No Deposit. No Interest. No Repayments until August 2012
"Why yes I would. How kind. Thank you very much. This must be costing your employer a fortune, eh?"

"Er, yes. A fortune. Here, please fill out this form so I can get my commission."

"There is no pen."

"Oh, yes, that. Here is a knife. We prefer blood."


"I don't know, it just seems, well, more appropriate."

The first thing one needs to understand is that none of these deals are offered by the retailer themselves. Sydney's deal is through HSBC, while Harvey Norman offers a deal through either GO MasterCard, GO Business MasterCard, Buyer’s Edge or GE CreditLine. All of these are fronts for GE Credit and are broadly the same, so I'll focus on GE CreditLine.

When taking up this deal, I am, in fact, signing up for a new credit card. GE Credit has a $25 establishment fee, so that $1,000 computer has now cost me $1,025. It also has a $3.95 per month account servicing fee, so in the 15 months of "No Interest. No Repayments", I will in fact pay an extra $60, bringing my total to $1,085. This is equivalent to paying almost 7% p.a. interest over this period. To be fair, up to this point this is not that bad a deal, compared with a personal loan or standard credit card**.

And then my "No Interest. No Repayments" period ends. If I am smart, I will immediately pay the full amount, close the account, cut up the card and invest in an emu farm. But maybe things are a little tight this month, the iPad 3 just got released or I have to post bail, and I don't pay it off straight away. Now it starts to get expensive. The interest rate is 29.99% - outrageous even by credit card company standards. Plus, my $3.95 monthly fee continues until I get my debt below $10. If I take an extra year to fully pay off this crappy, now totally out-of-date computer, then I am looking at paying around $200 more, pushing my total cost to around $1,300.

And don't forget that these deals are always on the ticketed price, and I probably could have saved a couple of hundred bucks by doing a deal at a different retailer.

In short, these interest free deals are not a generous offer from you friendly local retailer. They are an inducement to get you to sign up to a new, grossly overpriced credit card.


**It is of course shithouse compared with paying cash, but who buys anything with money they already have anymore. Chumps, that's who.

1 comment:

Anonymous said...

Not bad if you have 8k cash to spend on new stuff, just invest the 8k at 4.5% in an online no fees account and pay off after the interest free period. That works out to a reasonable discount for nix