I am not talking about lay-by here.
Buy now, pay (dearly) later. You must read (and ensure you understand) the fine print. This type of debt is sold as “Nothing to pay ’til 2024”, with 6, 12, or 24 months interest free. It is NOT sold as what the interest rate is after the end of the interest free period. Why? ‘Cause if they told you in the ad what the interest rate was, you wouldn’t take up the offer.
If you forget to repay the loan or you find yourself in financial strife by the due date and you pay just one day late, interest is charged from the day of the purchase, NOT from the end of the interest free period. Buying this way also dramatically reduces any bargaining power you may have. People who buy using store credit with an interest free period will likely have to pay the marked price.
Some types of store credit require regular payments during the interest free period, and on the surface they look like a good deal, until you add all the extra fees and charges that are built into the loan.
If you have obtained more than one interest free loan from one lender, the lender can allocate your repayments to whichever loan it wants. This can result in your loans not being repaid within the interest free period.
If you decide to purchase something using store credit because you don’t trust yourself to use a credit card responsibly, then you need to know that many of these interest free contracts come with a credit card that you don’t separately sign up to. It is mailed to you after you have taken on the store credit, and it will have an average interest rate of about 27%.
A guy who used to work in retail once told me how he and his colleagues were under an incentive to push customers into purchasing goods using interest free terms. He said that there was no need for the customers to prove their income and no formal credit checks were done either. Interest free loans were given to people who were obviously not in a position to take on more debt and they often ended up paying rates of interest as high as 39%. The salespeople would push these loans not because they believed they were doing their customers a service, but because they were earning between a third and half their income from loan commissions.
Even when you think you will not be paying interest, you might if you buy a bed from Sleep City in Fyshwick. Looking at this ad, you’d reckon if you bought this bedroom package for $1,345 that you could pay it off over two years without being hit with interest. Multiply your $12.93 weekly payments by the number of weeks in 24 months (12.93 x 104) and the grand total comes to $1,344.72. Read the fine print and it says, “Paying only the minimum monthly repayment will not pay out the loan before the end of the interest free period.” Huh? Surely they are not talking about a matter of 28 cents!
Keep reading that fine print: “Establishment fee, account service fee and other fees and charges are payable.” To be fair on Sleep City, it’s actually GE Money who set the conditions for this credit.
I do not recommend store credit. With any type of credit, if the offer sounds really good, ask yourself how the promoter can afford it. You’ll find the answer in the fine print.
Places like Harvey Norman, through companies such as Flexirent, will often offer store credit alongside rental agreements. Read the fine print and you find clauses like:
- Late payment fees of at least $25 per day;
- You agree that Flexirent can collect personal information about you from insurers, any of your employers, former employers, debt collection agencies, private investigators, lawyers, landlords, government authorities and the internet (among others);
- You agree that your personal details can be disclosed to any person as permitted by law (personal details that you can have access to, for a fee); and,
- The chance to return the equipment at the end of the lease without having to pay more.
That’s nice of them. No fee to give it back. Pretty rough, particularly considering the rental of a $1,200 computer costs about $1,600 for 12 months.
Don’t go to Harvey Norman if you can’t afford to pay upfront for your new, expensive bed. Go to Fantastic Furniture. Or Ikea. Buy a bed that you can afford and sleep well knowing you don’t owe money on it.
What about Afterpay? Although it’s not store credit, Afterpay is a buy now, pay later business that requires payment in instalments due in full six weeks after the purchase is made. You won’t pay interest with Afterpay but if you pay late, expect fees of up to 25% of your purchase price. Oh, and merchants are charged between 3-7% for using Afterpay. So you would expect businesses that don’t offer it to be selling goods and services at anything up to 7% cheaper prices.