Interest free - But not cost free!

I have been very interested in watching the advertising by some retailers over the Christmas/holiday period.

 

It seems to me that there have been many sales advertised giving the impression that this is a one off event – you must do it now to save a huge amount of money. It also seems to me that just a few weeks later the same people are saying the same thing in a slightly different way. An example of this, is a pre Christmas sale, then an after Christmas sale, then a New Year Sale and then a back to School sale.

 

So what can we learn from this? There will always be sales. Let your emotions decide before spending your money. Ask yourself – do I really need this item or do I just want it.

 

My curiosity was raised enough by the advertising to go and check out “interest free” deals being offered, especially the ones being offered for a long period of time. So I got a brochure on the company offering the finance at no interest.

 

I am one who loves to read the fine print and work out different scenarios of the real cost of things. This is what I found. This particular card I looked at required a minimum purchase of $100.00 before you could have one. The set up fee for this account was $35.00 which I was told could be added to the first purchase. The cost of the card was $25.00 per annum, only payable if the account was open for more than a year.

 

So, if you bought something electrical or a piece of clothing for $100.00 and put it on this particular type of card the item would cost you $135.00 if you paid it off in under a year. What percentage is $35.00 of $100.00? – it is 35%.  Yes, it is interest free but doing this type of transaction would cost you another 35% more than the advertised price.

 

Another interest free deal that I looked at had a minimum purchase of $1000.00 which could be taken over four years. It too had a set up cost of $35.00 and an annual fee of $25.00. What percentage of $1000 is $35.00 plus four lots of $25.00 which equals $100.00. Total $135.00. This percentage is 13.5% of the total price. Yes interest free – but not cost free. This $1000 item would cost you not $1000 but $1135.00 and you would be committed to payments for four years.  This equates to 11.35% extra than the original price of the goods.

 

Many people justify getting an interest free deal because they can keep their money in the bank earning interest which is a great idea. However, a quick check I made of one bank showed me that a minimum term deposit of $1,000 paid 2% interest for a year minus tax. If you have to pay 11.35% extra over four years because of costs on your purchase of $1,000 does it make smart financial sense to keep your money in the bank earning 2% minus tax?

 

Yes, it is interest free – but not cost free! 

 

Before you rush out and get tht amazing deal on no deposit and four years to pay, stop and think “what it is really costing you?”

One of my favourite sayings is “it is not how much money you make, it is what you do with what you earn that matters”.

 

Sylvia’s  book, Parents: How to stop your kids from going broke is available from www.silbo.co.nz, Paper Plus Stores, and Christian Bookshops. She is also available to speak with community groups and give tips on how to raise financially savvy kids. Sylvia’s next series of workshops is at Katikati community centre starting 18^th February.