Interest Free Loans - Are They Any Good?

By Sandy Naidu

Many retail outlets (example - furniture outlets, electronic stores) offer you credit to purchase items from their outlets. For a set period of time, there will no interest charged on the credit they offer. This period varies from store to store and is usually 12 months to 24 months. These loans are called 'interest free loans'. It does sound too good to be true, doesn't it - the truth is in most cases it is actually too good to be true.

If used properly these loans can turn out to be beneficial to you but on the same token if used incorrectly they will cost you heaps. Unfortunately the number of people losing out on these loans is far greater than people gaining from them. In this blog post I am going to write about some of the main points you need to watch out and remember when you sign up for these loans:

1. After the interest free period ends, interest rates will kick in - these rates will usually be double the rates of a credit card (can be anywhere between 25% and 30%). The rates will not be the same as the official lending rate so be sure to check what your rates are going to be.

2. Most of these loans will ask to you to make a minimum repayment every month (even during the interest free period). If you pay just the minimum amount, the loan will not clear before the interest free period ends. There will be still be an outstanding amount after the interest free period ends and then that amount will be charged interest at very high rates.

3. When the interest free period ends, most merchants start charging interest for the outstanding amount from the day you purchased the item and not from the day the interest free period ended.
interest free loans 4. Interest free does not necessarily mean 'fee free'. They might be charging you unnecessary fees, fees which you normally would not be paying if you bought the item outright or financed it through a normal loan.

5. Sometimes along with the interest free loans you might also get a credit card as a bonus. Again another encouragement to spend more - beware.

6. The purchase price of the item you are purchasing through these loans could be much higher than what other merchants are selling it for.

The way to turn the interest free loans to your advantage is to pay off the entire amount before the interest free period ends. Don't ever pay just the minimum amount - pay more than the minimum amount and finish off the loan as soon as you can.

Read the fine print and make sure you understand all terms and conditions. Don't be afraid to ask questions - it is your money after all. If you cannot repay the loan amount before the interest free period ends then sometimes a low rate credit card can be a better option. So consider all your options and do your sums before you make the decision.

And finally, here is the golden rule - don't purchase an item just because there is an interest free loan. Buy it only if you truly need it. No impulse buying.

Sandy Naidu shares her personal finance knowledge on her blog - http://www.FutureNestEgg.com On her blog, she explores new and existing opportunities available in the financial world - all with the aim to educate herself and her readers. To read more personal finance articles visit her blog at http://www.FutureNestEgg.com

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